And so the consequences for Europe of accommodating the US, and the rest of the world, in having the EUR soar following ECB intervention while everyone else's currency is diluted to death, comes to the fore, following today's announcement of German 2012 GDP which came below expectations of 0.8%, printing at 0.7%, with government adding a substantial 1.0% to this number, while plant and machinery investment tumbled by a whopping -4.4%. And while the specific Q4 data was not actually broken out, a subsequent report by the German stat office indicated that Q4 GDP likely shrank by 0.5% in Q4. All that is needed is one more quarter of sub zero GDP, which will almost certainly happen in Q1 absent a massive surge in government spending which however will not happen in tapped out Germany, whose resources are focused on keeping the periphery afloat, and thus the EURUSD high, and Germany's exports weak. Confirming this was a Bild report which stated that the government now sees 2013 GDP growth of a paltry 0.4%, which assumes growth in H2. One wonders just how much longer Germany will opt for a currency regime that punishes its primary GDP-driver: net exports, at the expense of nothing beneficial but making tourist trips to Greece far more expensive than under the Drachma.
There was however, much cheering in depression riddled Spain (unemployment in the mid 20%s and rising): earlier the country sold €5.75 billion of 12 and 18 month bills, at rates that tumbled compared to the like auction in December. Just more draining of Social Security Funds, or yet another ECB backdoor bailout? Does anyone even care any more: it is not like the bond market in the periphery reflects anything besides the intentions of German taxpayers to keep funding the endless PIIGS bailout.
The other big overnight news was the reported end of the JPY collapse, with the USDJPY now trading at 88.30, some 130 pips lower than last night's highs, following various comments from various Japanese officials, some of which may have been misinterpreted, but all of which served to remind the market that the period of promises by the BOJ and Abe is over. Now is the time for action, and sadly as has been the case in Japan in over 30 years, it is the "action" part that is sorely lacking. Either way, the global non-US based risk rally came to a screeching end with the end of the JPY collapse, and hopes that Japan just may succeed in clawing its way out of a deflationary hole on the back of currency debasement without actually seeing a comparable surge in bond yields that would crush its banking sector.
And perhaps most ominously for the US, Fitch once again woke up the headline scanning giant, with comments by its Global Analytical Head Ian Linnell who warned that both UK and US ratings are now under threat. Time for the US downgrade rumor?
More on the overnight trading and event recap from Deutsche
Despite a +3% rally in Chinese equities yesterday, the S&P500 (-0.09%) remained largely in consolidation mode after hitting a post-financial crisis high of 1472.12 last Thursday. I suppose 2012 should be a lesson in the fact that Chinese equities can go in a completely different direction to the main developed market equivalents. The US seemed to be held back by Apple (-3.6%) with technology (- 0.8%) and telecoms (-1.06%) leading declines after reports surfaced in the Nikkei on Monday that the company’s 1Q13 component orders have been in cut in half due to lower than expected demand for the iPhone 5. To be fair I haven't bought a new Apple product for about 10 months now. A lifetime in Apple time!
Technology stocks would have ended the day even lower were it not for reports that Dell was in talks to go private (Bloomberg). The stock bounced 13% following the report and its 5yr CDS widened by 110bp to 315bp, which drove some of the underperformance in the CDX IG credit index (+2bp) yesterday.
In the US, leaders from both parties ratcheted up the rhetoric over the debt ceiling debate. Risk generally traded with a weaker tone leading into Obama’s final press conference of his first term. Obama told reporters that Republicans were threatening to hold a “gun at the head of the American people” and that he wasn’t willing to negotiate around spending cuts in return for an increase in the debt ceiling. Nonetheless, it appears that we’ll need to dig in for another round of protracted negotiations after John Boehner and Mitch McConnell responded that the upcoming debt ceiling debate is indeed “the perfect time” to “get serious about spending”. Outgoing Treasury Secretary Tim Geithner sent a letter to Boehner reiterating that the US treasury would exhaust its extraordinary measures between mid-February and early March and urged Congress to lift the debt ceiling well in advance of that point.
It was a relatively active day in the world of Fedspeak with Williams, Evans and Lockhart all speaking yesterday ahead of Bernanke’s Q&A session after the US market closed. The usually dovish Williams said that the Fed will continue to purchase MBS and treasuries well into the second half of 2013 while the more hawkish Lockhart warned that QE could have “longer-term consequences that are worrisome”. Bernanke himself offered very little new information, saying that he remains concerned about the state of the labor market and defended the impact of QE saying the “significant inflation” will not result from asset purchases. He dismissed the idea of the Government minting a trillion-dollar platinum coin to pay off debt, saying that he was “not going to give that (idea) any oxygen”.
Turning to overnight markets, most major markets are trading higher with the highlight being another positive day for the Shanghai Composite (+0.38%) following yesterday’s +3% gain. Elsewhere in Asia, continued concerns over Apple’s component orders are leading equities lower in Korea (KOSPI -0.95%) and Taiwan (TAIEX -0.75%), while a number of technology stocks on the Nikkei are also underperforming. Meanwhile, the broader Nikkei index (+0.57%) has pared earlier gains and USDJPY is down 0.55% after Japan’s economy minister Akira Amari said that the country faces risks from any excessive decline in the value of its currency. Amari added that the yen is correcting in line with economic fundamentals. Ahead of next week’s BoJ meeting, governor Shirakawa noted the downside risks to Japan’s economy particularly in terms of export markets, and said that the central bank will continue to pursue “powerful easing”.
Japanese 10yr JGB yields are below 0.8% for the first time in more than a week. In the credit space, both the Australian and Asian IG indices are trading 1-2bp wider on the day. Recapping the European headlines, S&P affirmed Finland and Luxembourg's AAA ratings and revised their outlooks to stable from negative. S&P added that "the Finnish government appears committed to pursuing strong fiscal and structural policies that should enable the economy to grow above 1% in the medium term". Luxembourg's ratings "reflect our view of its wealthy economy with a strong government balance sheet and sizable external surpluses," S&P said in a statement. Moody's rates both sovereign's at Aaa with negative outlooks. On the data front, EU Industrial production for November was weaker than expected at - 0.3%mom (vs +0.2% expected), falling for the third straight month, partly driven by a - 1.0%mom reading in Italy (vs -0.2% expected).
Turning to the day ahead, the highlight during the European session is likely to be Germany’s 2012 GDP and inflation data in the UK, Italy, Spain and Germany. Germany will auction EUR5bn in 2023 bonds. In the US, the focus will be on retail sales, PPI and the Empire manufacturing survey for January.