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Futures Fizzle, Europe Red As Markets Ask: "What Do Central Banks Do Now?"
In our Chinese stock market wrap following Friday's unexpected rate cut, which saw the Shanghai Composite storm out of the gate, we said that "we would not be surprised to see China's stocks sliding back into the red very shortly as "sell the news" concerns return, and as the increasingly more addicted "markets" demand even more liquidity from central banks just to stay unchanged, let alone rise to new all time highs." Sure enough, with just minutes to go before the close, the SHCOMP wiped out all its daily gains and was set for a red close had it not been for the "national team" miraculous last minute intervention which was inevitable after Friday's PBOC rate cut, and which lifted the composite 0.5% into the green as the euphoria was rapidly evaporating.
That largely summarizes market sentiment across the board as stocks, having soared by a ridiculous amount in the past month on a progression of ever worse (and in China's case, ever more fabricated) data, on a historic short squeeze, and on a surge in central bank jawboning, appear to have hit a plateau, and as of this moment both European stocks and US futures were trading slightly red on the day. Call it "central bank saturation", call it markets confused just what central bankers, many of whom have again blown their wad, will do next.
Not helping sentiment was the latest confirmation from Japan that contrary to expectations, the BOJ will do absolutely nothing on Friday (as the Fed and ECB have already done its work for it), when overnight Koichi Hamada, an adviser to Japanese Prime Minister Shinzo Abe, told Reuters that Bank of Japan can "wait for a while" to conduct more monetary easing as long as Japan’s jobs-to-applicant ratio and unemployment rate show the labor market remains tight. Amusingly, Hamada said there is "speculation Fed may raise rates keeping yen weak, taking pressure off Kuroda to take action." This follows a statement by Etsuro Honda, another adviser to Abe, who on Friday also admitted that additional easing wasn’t necessary, thereby assuring that anyone hoping for a Friday QQE boost by the BOJ will be disappointed.
What Hamada forgot to add is that the Fed (and ECB) taking action only pushes the Yen lower because it is the funding currency. If and when the market tumbles again, the Yen will soar, as it hinted at overnight, when it dipped 70 pips to an overnight low below 100.8.
On the macro front, perhaps the reason why stocks did not fly higher is because the only bad data was Germany's IFO Current Assessment, which missed expectations of 113.5, and printed at 112.6 down from 114, while both IFO Business Climate and Expectations beat by a modest amount.
Back to markets, in Asia we saw stocks trade mostly higher in reaction to the PBoC cutting rates on Friday, although concerns of a weak Chinese economy resulted in the paring of some gains. Shanghai Comp. (+0.5%) was initially underpinned by the PBoC measures coupled with strength in financials following the removal of the deposit rate ceiling, however concerns surrounding the Chinese economy saw some of the gains trimmed. ASX 200 (-0.1%) failed to hold onto to early gains to close flat, while Nikkei 225 (+0.7%) traded in positive territory with the index lifted by positive earnings reports for Hitachi (+7.50%) and Panasonic (+7.30%). 10yr JGBs traded lower due to strength of Asian stock markets, while the BoJ also refrained from buying any bonds under its QQE program as expected.
The week kicked off with European equities in the red (Euro Stoxx: -0.2%) amid touted profit taking after last week's gains and position squaring ahead of the key risk events later in the week, namely the BoJ and Fed meetings . In terms of company specific news, the notable movers today see Deutsche Bank (-2.1 %) underperform after reports that the US has stepped up probe into the bank's Russian trades as well as WPP (-1.9%) after their earnings update, while Porsche (+1.6%) are among the best performers in the wake of reports that VW may have to spin-off the unit.
In terms of fixed income, Bunds kicked off the week in modest positive territory , supported by last week's dovish ECB as well as month-end related flow and supportive cash flow, with around EUR 16.5bIn of supply this week and EUR 45b1n worth of coupons and redemptions. However the German benchmark came off its highs during the European morning to trade flat on the day, trending lower in the wake of the latest IFO release (Business Climate M/M 108.2 vs. Exp. 107.8, Current Assessment M/M 112.6 vs. Exp. 113.5), which was unfazed by the Volkswagen emissions scandal, citing IFO economists.
In FX markets the JPY has been the notable outperformer, with USD/JPY falling amid touted profit taking following last week's gains, while earlier comments by BoJ adviser Hamada, who said the BoJ can refrain from further easing at this stage, have also weighed on the pair. Of note, USD/JPY now trades back below the key 200DMA line and the next major support level is seen at the 50DMA level, 120.33. While 1-month dated spreads vs realized vols indicate over-valuation (the shorter-dated 1-week spread is at its widest level since June 2013) and given a slew of major risk events suggests somewhat choppy price action by the underlying spot.
Commodity currencies including CAD and AUD have also seen notable upside this morning, benefiting from strength in the energy complex with WTI and Brent crude futures both residing firmly in positive territory, benefiting from the weaker USD, with the USD-index lower by 0.2% today.
BoE Governor Carney said that 4% of UK mortgage holders will be at risk of not being able to pay their mortgages if the BoE hike rates as expected and added that while there is no certainty rates will be hiked, it is the central expectation of the MPC.
Looking ahead, today is relatively light in terms of tier 1 data, with the notable highlight coming in the form of comments from ECB's Mersch. Looking ahead, today's notable US earnings include Hartford Financial Services, Broadcom and AvalonBay Communities.
Market Wrap
- S&P 500 futures down 0.2% to 2061
- Stoxx 600 down 0.2% to 377
- MSCI Asia Pacific up 0.4% to 136
- US 10-yr yield down less than 1bp to 2.08%
- Dollar Index down 0.23% to 96.91
- WTI Crude futures up 0.6% to $44.88
- Brent Futures up 0.6% to $48.27
- Gold spot up less than 0.1% to $1,165
- Silver spot up 0.6% to $15.91
Key News Bulletin Headline Summary from Bloomberg and RanSquawk
- The week kicked off with European equities in the red amid touted profit taking after last week's gains and position squaring ahead of the key risk events later in the week, namely the BoJ and Fed meetings
- Commodity currencies outperform, benefiting from strength in the energy complex while JPY sees strength amid touted profit taking and comments by BoJ adviser Hamada stating the BoJ can refrain from further easing at this stage
- Today's highlights include comments from ECB's Mersch and earnings from Hartford Financial Services, Broadcom and AvalonBay Communities
- China’s leaders gathering in Beijing this week to formulate the 13th five-year plan confront an era of sub-7% growth; manufacturing and residential construction are sputtering, and new areas like consumption, services and innovation aren’t picking up the slack quickly enough
- GM Reaches Tentative Agreement With UAW Workers, Avoiding Strike: Tentative four-year agreement that is expected to provide raises across the board
Valeant CEO’s Outsider Roots Spun Market Gold, Until They Didn’t: CEO Michael Pearson, facing heavy criticism from investors, analysts, will address concerns today - BlueScope to Buy Cargill’s North Star Stake for $720m; BlueScope now has full ownership of North America’s most profitable mill
- EQR to Sell Apartments to Starwood Capital for $5.4b: WSJ: To deliver ~$3.8b of proceeds as div. in Jan. 2016
- Toyota Regains Global Sales Lead as VW’s Focus Shifts to Scandal: Toyota said Monday it sold 7.49m vehicles this year through September, topping the 7.43m that Volkswagen reported earlier this month
- Biden Says Opted Against White House Bid Because He Couldn’t Win: Biden concluded that, “so late in the game,” he couldn’t put together campaign to derail Democratic frontrunner Hillary Clinton
- Sony CEO Aims to Build on Recovery With Toshiba Sensor Deal: Sony in talks with Toshiba to acquire its image sensor for 20b yen ($165m)
- Standard Chartered Winding Down Equity Derivatives Business: Bank will phase out businesses after Jan exiting from institutional cash equities, equity research, equity capital markets
- ‘The Martian’ Retakes Box Office Lead as New Films Disappoint: Collected $15.9m in U.S. and Canadian theaters vs est. $12.5m
- German Business Confidence Falls as Global Risks Take Toll: Ifo institute’s business climate index declined to 108.2 from 108.5 in September. The median estimate was for a drop to 107.8
- Volkswagen AG lost the lead in global auto sales to Toyota Motor Corp. after claiming the No. 1 spot three months ago, as the German carmaker braces for consumer blowback from a widening emissions-cheating scandal
- European leaders clashed over how to manage the influx of hundreds of thousands of refugees forging through the region’s eastern flank as they warned that Europe is buckling under the strain of the crisis
- U.S. Gasoline Drops to $2.2386 a Gallon in Lundberg Survey
US Event Calendar
- 10:00am: New Home Sales, Sept., est. 545k (prior 552k)
- New Home Sales m/m, Sept., est. -1.3% (prior 5.7%)
- 10:30am: Dallas Fed Mfg Activity, Oct., -6 (prior -9.5)
DB's Jim Reid completes the overnight wrap
Well the monetary plates got spun pretty hard again last week as a dovish Draghi and a Chinese rate cut sparkled through financial markets on Thursday and Friday. This week there are further possibilities for more monetary policy fairy dust as the Fed (Wednesday) and BoJ (Friday) meet. We also have the very important Chinese Plenum (Monday-Thursday) which will have major implications to how much stimulus China needs to apply depending on the aggressiveness of their growth target over the next 5 years (more later).
Overall our view continues to be that while inflation is this low at a global level central banks will step on the gas again and elevate asset prices for the foreseeable future and continue to keep the gap wide between technicals and fundamentals in many countries. This leaves huge gap risk lower for financial markets but that's more of a problem for when central banks are unable or unwilling to act. This could happen first when inflation looks more likely to consistently test the 2% level. This may occur at some point in 2016 in certain areas of the globe, dependant on activity levels and commodities but for now its party on.
Back to China, the PBoC cut benchmark interest rates by 25bp and the reserve requirement ratio (RRR) by 50bp on Friday - the former being a surprise to our economists who think it reinforces their view that economic growth will rebound in Q4 to 7.2% yoy from 6.9% in Q3. They expect 4 RRR cuts but no interest rate cut in 2016 as their baseline case. They also think the rate cut suggests that political pressure may be building up to achieve the 7% growth target. We'll find out more after this week's Plenum, especially with the latest (13th) 5-year growth plan although it may take some time for all the news to be official and filter through. It took 9 days after the Plenum for the details of the 5-year plan from 2010 to be released. Our guys think a 7% target would require notably looser policy than a 6.5% target. They think keeping the former is more likely.
After the PBoC rate cut on Friday, Chinese equity markets are off to a solid but unspectacular start with the Shanghai Comp (+0.91%) striking a two-month high and the CSI 300 and Shenzhen +0.95% and +0.89% respectively. There’s minimal change in the CNY, currently +0.01% after the PBoC strengthened the fix by 0.07% this morning. Meanwhile, equity market gains in Asia are being led out of Japan where the Nikkei is +1.11%. Elsewhere there are modest gains also for the Hang Seng (+0.14%) and Kospi (+0.18%). Asian credit is a couple of basis points tighter, although US S&P 500 futures (-0.2%) are pointing towards a slightly softer start.
Moving on. With market pricing for a Fed rate hike on Wednesday sitting a lowly 6% and with no Yellen press conference scheduled, the focus will be predominantly on the tone of the FOMC statement this week. Our US economists expect the FOMC to adopt a dovish tone in its statement which should decrease the probability of a December hike further. While they won’t have the Q3 GDP data, our colleagues believe that at their best guess the FOMC will be operating under the assumption that growth was only 2% at best last quarter, while the Fed’s preferred inflation metrics were still running well under 2%. Coupled with the highly uncertain outlook for overseas growth, they expect the Fed to mark down its assessment of the near-term economic outlook, in particular its labour market projections.
A closer call for a change in policy could be this Friday’s BoJ meeting. The most recent Bloomberg survey (run from September 29th to October 2nd) had 15 out of 36 economists (42%) forecasting for the BoJ to ease further through expanding purchases. This was up from 11 economists at the beginning of September. 4 expect the BoJ to go in January 2016 and 1 each in March and April next year, while 13 (or 36%) don’t expect any change to the current stimulus package. It’ll be interesting to see if we get any further surveys this week, particularly post the PBoC. Our economists in Japan maintain their view that an additional easing is unlikely. In their view economic data thus far has not deteriorated to a degree that would justify an additional easing and this week’s data in Japan is unlikely to affect the BoJ’s decision. They do however expect the BoJ to revise down its forecasts for GDP growth and inflation and defer its target date for achieving 2% for the latter from the current H1 FY16.
Along with this week’s central bank meetings, earnings season ramps up another gear this week with 167 S&P 500 companies due to report (30% of market cap) and 93 Stoxx 600 companies due to release their latest results. The highlights are at the end of this morning’s EMR, but following Friday’s releases its worth updating our latest beat/miss monitor. After a number of high profile reports on Thursday, just 10 S&P 500 companies were out with earnings on Friday, the highlight being a mixed Procter & Gamble report where despite a beat in earnings, sales trailed analyst estimates after the stronger USD was said to reduce sales by 9% during the quarter. Overall, the earnings reports we did get on Friday were fairly soft. Of the 10 S&P 500 members, 7 beat EPS projections but none beat revenue estimates. That means, with 173 companies having reported so far, 73% have beat earnings expectations but just 42% have beaten sales estimates (down from 75% and 45% respectively on Thursday). This is softer than what we saw in both Q2 (75% and 49%) and Q1 (73% and 48%) this year, with the weakness in revenues especially evident as we’ve seen signs of the stronger Dollar, slower global growth and weakness in commodity prices all impacting results to various degrees. The one notable sector outperforming at the top line is the tech sector, with 15 of 22 companies (68%) to have released their quarterly reports so far having beat estimates. It’ll be interesting to see if Apple, due to report on Tuesday, can continue the trend.
The earnings we got from bellwether tech names after the bell on Thursday (Amazon, Microsoft and Alphabet), along with the China move, helped support a strong day for risk assets on Friday. The S&P 500 closed +1.10% and in the process moved back into positive territory (+0.79%) YTD. The Nasdaq (+2.27%) was the relative outperformer while the Dow finished +0.90%. Credit had a strong session also with CDX IG finished nearly 3bps tighter.
There were similar moves for risk assets in Europe too. Crossover and Main rallied 17bps and 4bps tighter respectively, while in equity markets the Stoxx 600 surged 1.99% to extend its two and a bit month high. Taking a closer look at earnings season in Europe so far and with 101 companies having now reported in the Stoxx 600, just 54% have beat earnings expectations which is down on both Q1 (57%) and Q2 (61%) this year. The notable weakness however has been at the top line. Just 45% have beaten expectations so far this reporting period. That compares to 72% in Q1 and 66% in Q2 this year. So some notable deterioration in results this reporting period so far relative to what we saw in the previous two quarterly periods of the year.
Data on Friday was centered on the flash October PMI numbers which were generally supportive. In the US we saw the flash manufacturing print rise 0.9pts to 54.0 (vs. 52.7 expected) and to the highest since May. Meanwhile in Europe the Euro area composite print rose 0.4pts from September to 54.0 (vs. 53.4 expected). This was supported by a stronger services reading (+0.5pts to 54.2; 53.5 expected) while the manufacturing reading stayed stable at 52.0 (vs. 51.7 expected). Regionally, there were 0.4pts rises for the composite readings in both Germany (54.5 vs. 53.7 expected) and France (52.3 vs. 51.6 expected). Our colleagues in Europe believe that the latest data for the month supports the view of GDP growth of between +0.4% and +0.5% qoq in the Euro area, which is an upside risk to their +0.3% Q4 projection should we see no change in November of December.
Wrapping up Friday’s newsflow and back to China briefly, there was also plenty of chatter that the IMF is set to give the go ahead to include the Chinese Yuan in the fund’s basket of reserve currencies. A Reuters article from the weekend is suggesting three people briefed on the IMF discussions have said that a draft report from staff had reached a favourable conclusion. A formal date to confirm the decision in November is still yet to be announced.
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"What Do Central Banks Do Now?"
Same thing they have been doing, they will not stop pumping. The CB's only know one thing,print,print,print...debt,debt,debt!
When the un-fed does not raise rates in Dec. and goes NIRP shortly thereafter, many will say they can't believe it.
So, what happens after they go negitive?
you neglected to mention that they will also tell any number of lies ;)
"What this ends in is a closed loop of intervention ever more radical."
Jim Grant on where CB policy is heading.
http://www.bloomberg.com/news/videos/2015-10-23/listen-to-what-jim-grant...
Yes ironically CBs have painted themselves into a corner with only one policy tool at their disposal and no means to change course from disaster. The blame cannot be shifed, this is clearly the result of their action and the undermining of their own institutions. CBankers have made the case for the abolishment of CBs or at least the prosecution of CBankers for the irresponsible discharging of their duty to protect price stability and achieve balanced and sustainable growth. The recent policies have been an all out war on their mandate to service the political sphere with an appropriate economic climate for the advancement of narrow political rather than national economic agendas. The truth is these people are focused on short term results as they align with the political cycle rather than the long run sustainability of growth. It's high time we secularise economics, jail our CBankers and return to an era of sound money.
"..at least the prosecution of CBankers for the irresponsible discharging of their duty to protect price stability and achieve balanced and sustainable growth."
I don't see any mechanism set up for this thought at all, other than the uncontrolled noose and guillotine brigade that is often mentioned,
I'm not sure what the mandate for the central bank in your country is, but in mine it is price stability and growth. Neither of which are being achieved. So I argue this failure to dicharge their duty is at least a reason to fire them if not jail them. Maybe I'm misunderstanding you? Are you referring to legal structures to actually prosecute CBankers?
Perhaps different perceptions.
CB bankers regulating and reining in central banks brings to mind the old cliche involving foxes and henhouses.
Politicians are one of the tools in the banker's box.
+1 for "I'm not sure what the mandate for the central bank in your country is, but in mine it is price stability and growth "
btw, in the eurozone the ECB has only one mandate. price stability
now I'd love to moan that this mandate is not being achieved, but I can't. use some facts and verifyiable figures if you don't agree
and so we all continue with this dash over the horizon, into uncharted monetary territory
Geordie,
"I'd love to moan that this mandate is not being achieved, but I can't"
There are only two possible interpretations of that statement. Either your definition of "stability" is different to mine or you are unable to see the ongoing inflation because your eyes are tightly shut. Which is it to be?
For the avoidance of doubt, my definition of the word "stability" is the unchanging price of a good or service (not a substitution or reduced pack size i.e. ten eggs to a "dozen") measured in the fiat of your choice over a predetermined time period. There should be no difference between the nominal and real purchasing power of the said fiat by definition.
well, I use my own "CPI calculation" for my lifestyle, and another that I dubbed "typical family of industrial worker living a dignified though not easy life"
it includes flour/bread, typical foods, typical shelter, typical expenses. but not the cost of owning RE, then in the eurozone that is completely different, and depends on the country
according my calculations, we do not have prices that are changing more then 1% per year since a very long time for the second set
if I could, I would set the goal of the ECB to zero instead of 2%, but that's a different matter altogether. do you "compute differently"? if yes, I regret I have to ask which specific country you are referring to
Geordie, I'm in the UK. Inflation (wrongly referred to as a rise in prices rather than an increase in money+credit which is the more sound definition) is rife. However it is not necessarily directly visible unless you pay attention. The inflation is not in the rise in prices per se but in the devaluation of the item being sold. Either the pack size is simply smaller or deceptively changed so you receive less product whilst thinking it is the same size/quantity. We now have eggs sold in 10s instead of 12s. There are hundreds of examples. My favourite is the OXO cube. It is a meat stock cube used to make soups predominantly. Previously it was cube of dimensions 15mmx15mmx15mm. Now it has the same external dimensions but it is carved/shaped into the form of a 3D letter "X". Of course, you get less stock than you did before even although the overall dimensions and the external packet size are the same. ZH did an article a couple of days ago about SodaStream syrup. 29 servings instead of 50 for the same price using a modified design of bottle to make it look larger. It's everywhere if you care to look.
I don't know in which European country you live but I visit France, Spain and Germany reasonably often and I see the exact same shenanigans going on there too. I cannot believe you are blind to this.
"if I could, I would set the goal of the ECB to zero instead of 2%"
That is a statement of the blindingly obvious. Why on earth would you set a goal of 2% compounded theft rather than zero theft? Unless, of course, if you were in receipt of the proceeds of that theft.
Ditto what Dipoldicus said. Also note that even if "price stability" defined as constant purchasing power over time were attained by printing money out of thin air in exact proportion to productivity gains, the equivalent outcome could be attained by not printing, seeing prices decline, then the central bank summarily removing large quantities of money from your account every few months. It's hard to imagine anyone clamoring for this, lauding this as a goal, and feeling about it. But it is identical to the outcome central banks claim to be aggressively pursuing....but are falling short of because they are removing wealth from your holdings so fast that they are wildly overshooting and your purchasing power is plummeting.
More QE, NIRP. And outright purchases of stocks.
Central Banksters will stick with their failed strategies that enrich only the 0.1% till the bitter end
"What this ends in is a closed loop of intervention ever more radical."
Jim Grant on where CB policy is heading.
http://www.bloomberg.com/news/videos/2015-10-23/listen-to-what-jim-grant...
I'd feel better with Bernanke back at the helm. Yellen just doesn't have the chops.
When it's time to turn on the money spigot again, and that time is coming soon, Ben would do it without hesitation. Yellen will wait too long.
"What Do Central Banks Do Now?" Well, when you're in a liquidity trap, you print. There is no alternative.
The alt is jumping from the 14th floor.
there is an alternative, but it's called deflation
very common in the 19th Century, dreaded as the equivalent of admitting failure in the 20th and seen as the Black Plague in the beginning of the 21st
besides, any major CB going that way alone would cause immense amounts of hot "money" to flood it's own monetary zone
remember when the ECB maintained one measly percent of rates more then the dollarzone? resulting in the "... aaaand... it's gone!" sketch in South Park?
lead on, Yellen. we'll see where, eh?
my alternative of rope and trees is a more pleasing idea.
Liquidty trap implies that efforts by central banks to suppress interest rates are ineffective mainly due to high rates of saving. Last time I checked this is not a problem at all. Monetary policy has just become ineffective in it's results not it's execution. Apart from that technical point I think you're right on the money.
Almost ever dollar of QE that the Fed put out there stayed on bank balance sheets as "excess reserves"- never to see the light of day in the real economy. Lack of borrowing has a similar effect as excessive saving. I'd say it qualifies.
Fair enough. We really need a new name for this though.
Fraud?
We are always looking at various levels in the economic pyramid to judge its health.
Let's have a look at its foundations, the global consumer:
1) The once wealthy Western consumer has had all their high paying jobs off-shored. As a stop gap solution they were allowed to carry on consuming through debt. They are now maxed out on debt.
2) Japanese consumers have been living in a stagnant economy for decades.
3) Chinese and Eastern consumers were always poorly paid and with nonexistent welfare states are always saving for a rainy day. Western demand slumped in 2008 and the debt fuelled stop gap has now come to an end.
4) The Middle Eastern consumers are now too busy fighting each other to think about consuming anything and are just concerned with saying alive.
5) South American and African consumers are busy struggling with economies that are disintegrating fast.
Oh dear.
so we're all fucked ?
Absofuckinglutely.
Whats the bad news then ?
What do you call a deer w/ no eyes?
No eye deer.
What do you call a deer w/ no eyes and no prick?
No fucking eye deer.
What do you call a dead deer w/ no eyes and no prick?
Still no fucking eye deer.
they could try suicide
OT:
GUATEMALA CITY—Jimmy Morales, a former television comedy actor who promised to clean up Guatemala’s corrupt politics, won a landslide victory in Sunday’s presidential election.
~Wonder how long it will take this fellow to become corrupt. A week a month?
Who's the land whale on that picture? I feel sorry for his wife/mife.
Carstens is looking hungry