It has been yet another quiet overnight session, devoid of the usual EURUSD ramp, and thus ES, at the Europe open (although it is never too late), which has seen the Shangai Composite finally post a meaningful rise up 2.26%, followed by some unremarkable European macro data as Eurozone CPI came as expected at 2.0%, and German unemployment just a tad better, at -3K, with consensus looking for 0K. Italy continues to be the wildcard, with little clarity on just who the now expected grand coalition will consist of. According to Newedge's Jamal Meliani, a base case scenario of Bersani/Berlusconi coalition may see a relief rally, tightening 10Y BTP/bund spread toward 300bps. A coalition would maintain current fiscal agenda and won’t implement any major reforms with fresh elections being called within a year. A Bersani/Grillo coalition is least likely, may slow reforms which would see 10Y BTP/bund spreads widening to 375bps. Of course, everything is speculation now, with Grillo saying no to any coalition, and moments ago a PD official saying against a broad coalition. But at least the market has it all priced in already - for more see Italy gridlock deepens as Europe watches nervously [27].
In other bulletized news, here is what has happened in the past few hours, via BBG:
- Treasuries gain, yield curves bull- flattening, 5Y-30Y yields remain near lowest levels of past month following rally ignited by Italy political vacuum, rebound in EU risk premia.
- Gains in Treasuries may be related to month-end index extension buying; Barclays Index Duration Changes here
- Abe nominated Asian Development Bank President Haruhiko Kuroda to lead the nation’s central bank, raising the likelihood of further monetary stimulus this year; yen little changed at 92.15
- Italy is headed for a broad coalition government as bondholders pressure Pier Luigi Bersani and Silvio Berlusconi to set aside their rivalries and form a partnership, said Finance Undersecretary Gianfranco Polillo
- The Dutch budget deficit will breach the EU limit again this year and next as the economy shrinks and unemployment increases, according to the government’s planning agency
- Wal-Mart Stores Inc, already struggling to woo shoppers constrained by higher taxes, is “getting worse” at keeping shelves stocked, the retailer’s U.S. chief told executives, according to minutes of an officers’ meeting obtained by Bloomberg News.
- Bankers in the EU, who already have the toughest bonus curbs in the G-20, may face even stricter pay limits under a draft deal to bolster lenders’ capital requirements and rewrite Basel III
- Commodity currencies strongest overnight. U.S. dollar declines against yen and British pound; euro falls against 12 of 16 major counterparts. Nikkei gains 2.7%; European stocks, U.S. equity-index futures rise. EU peripheral yields mostly lower, spreads to Germany tighten. Energy, precious metals lower
In terms of what FX investors, which in a day of beta uberalles would mean everyone, are looking at, here is a quick recap via SocGen:
It’s not time to change gears and until we hear of genuine progress in the formation of an Italian government, scepticism will continue to rule financial markets and liquidity could become more problematic. In essence, the longer the uncertainty drags on and Bersani is dragged into discussions with other parties on the left (Grillo) and Berlusconi that lead down a dead end, the more investors will switch out of risk positions and return into cash and core bonds. Despite the report of spectacular gains in US business investment (bookings for core nondefence capital goods orders were 32.2% higher in Jan vs Oct-Dec average) and the statement by Fitch on US fiscal policy, the bond market was not rattled one bit. The Fed chairman Bernanke is of course providing important cover, but it is the equity market which is succumbing to a mix of Italian fear, quarter end positioning and a short bond investor base. The sequester will come into effect tomorrow and will see $85bn worth of spending hit different government programmes. Roughly 50% of the cuts are earmarked for defence. In total, the hit to 2013 GDP would be 0.2ppts.Playing down the impact of the sequester for US ratings, Fitch yesterday put all the emphasis on debt ceiling negotiations to reach a fruitful conclusion before May 19th expiry or face a ratings downgrade.
Jim Reid's provides the recap of everything else:
Markets are on the front foot overnight following the positive lead from the US session yesterday. In equities gains are being led by the Nikkei (+2.1%) as the market pushes ahead after PM Abe’s nomination of Haruhiko Kuroda to be the next BoJ Governor. The Nikkei is poised to close higher for the 7th straight month which would be its longest monthly winning streak since 2006. Elsewhere the Shanghai Composite and the ASX 200 are +1.8% and +1.3% on the day. China’s official PMI manufacturing print tomorrow will be a key read especially after the unexpected drop in the flash reading earlier this week.
Indeed markets enjoyed a positive session yesterday with the S&P 500 (+1.27%) closing above 1500 once again. In Europe, the FTSEMIB and the DAX closed +1.77% and +1.04% helped by a solid Italian bond auction. Italy sold EU6.5bn in 5-year and 10-year bonds yesterday as according to plan. The 10-year BTP yield closed 8.5bp lower at 4.811% while in credit markets the European Crossover index rallied 22bps to recover most of Tuesday’s widening although we are still about 10bps wider on the week.
Italy’s bond auction aside the market was also encouraged by some better-than-expected US pending home sales for January (+4.5% v +1.9% m/m expected) although Durable goods orders (-5.2% v -4.8%) fell more than expected. The core part of the release was stronger though. Markets sentiment was also supported by chatter that White House will hold a meeting to discuss the Sequester on Friday. According to Politico, the White House has invited John Boehner, Mitch McConnell, Harry Reid and Nancy Pelosi for a meeting tomorrow. As expected Bernanke’s testimony ahead of the House Financial Services Committee was largely a non-event expected although the Chairman said that the Fed may still decide to hold on to its bond portfolio to maturity as part of a review of its exit strategy.
Briefly on Italy the situation remains fairly fluid as Beppe Grillo yesterday described Bersani as a “dead man walking” and repeated that he won’t be joining any coalition. Meanwhile Finance Underscecretary Gianfranco Polillo said that a joint government between Berlusconi and Bersani is the only possible way forward. Italy’s economic sentiment index fell to 77.4 in February from a revised 80.0 in January. Next month’s reading will certainly make for an interesting read.
In terms of today the main US data will probably be the Chicago PMI and weekly jobless claims in the US. We also have the second reading of Q4 GDP in the US with our economists expecting the number to be revised up to +0.3% saar (from the initial reading of -0.1% saar) due to stronger than previously estimated construction and net exports. In Europe we will get unemployment data from Germany and consumer spending numbers from France but the focus will likely be on the political developments in Italy.