Unlike the session before, there has been little actionable news overnight, with the euphoria from the record high DJIA still translating into a buying panic, and forcing algos to buy futures because other algos are buying futures, and so on, simply because nothing says cheap like all time high prices (and forward multiples that are higher than 2007 levels [25]). The one event so far was the Europe's second Q4 GDP estimate which came in as expected at -0.6%, the fifth consecutive decline in a row. More notable was that Q4 exports tumbled by 0.9% which was the biggest fall since Q1 2009. And while the news has served to keep the EURUSD in line and subdued ahead of tomorrow's ECB conference, the stock market buying panic has moved to European stocks which continue to ignore fundamentals, and are soaring, taking peripheral bond yields lower with them, despite ongoing lack of any clarity what happens in Italy as Bersani is ready to propose a government to parliament which is certain not to pass. But in a world in which fundamentals and reality have lost all significance, and in which only momentum and hope matter, we expect that risk will continue being bid in line with central bank balance sheet expansion until this tired 4 year old last recourse plan no longer works.
Speaking of central bank balance sheets, Credit Suisse Japan vice chairman and former Bank of Japan board member Atsushi Mizuno spoke in an interview in Tokyo on Haruhiko Kuroda’s prospects if confirmed as central bank governor. Mizuno said that he sees risk of bond-market bubble if BOJ purchases become excessive (which they will) and said that efforts by Kuroda to “do something new” may lapse with BOJ returning to current policy framework. "Increased bond buying would cause over-dependence on the BOJ and that’s not healthy for the market. I see the risk of a JGB bubble." Obviously, all his warnings fell on deaf ears and were otherwise ignored: all is fair in love and pushing the "wealth effect."
Today, Federal offices are closed in anticipation of a major snow storm, which may or may not complicate efforts to seasonally adjust this Friday's NFP number, of which we get the seasonally adjusted preview courtesy of the ADP private jobs number, which will send the DJIA high if good, and higher if bad. Consensus is for a +170K print.
Contrary to stocks, FX traders have had a very dull day, especially with the ongoing ES-EURUSD divergence getting deeper and deeper as all traditional correlation fall apart in the name of pursuing the stock market higher. From SocGen:
Currencies have been a fairly dull affair so far this week, at least in the G10 where all are trading within 0.8% vs the USD since last Friday. The Bank of Canada rate decision is not expected to cause any fireworks. Having raised the bar for higher rates at the last meeting, a reiteration of the more dovish stance should keep USD/CAD in the ascendency with resistance situated at 1.0342/63. Final eurozone Q412 GDP is not expected to bring a revision from the -0.6% qoq first estimate. Germany sells an additional EUR4bn 5y notes (previous b/c 1.90, average yield 0.68%).
A quick look at European markets:
- Spanish 10Y yield down 4bps to 5%
- Italian 10Y yield down 9bps to 4.65%
- U.K. 10Y yield down 1bp to 1.96%
- German 10Y yield up 1bp to 1.46%
- Bund future up 0.06% to 145.11
- BTP future up 0.61% to 110.26
- Euro down 0.18% to $1.3029
- Dollar Index up 0.12% to 82.18
- Sterling spot down 0.25% to $1.5089
- 1Yr euro cross currency basis swap unchanged at -21bps
- Stoxx 600 up 0.1% to 294.39
DB's Jim Reid and his extended take of all that has happened in the past 24 hours.
There are little signs of any ailments affecting US stocks at the moment as the DOW last night (+0.89%) closed at its record high (14,254), eclipsing the previous high seen on 10th September 2007. Maybe I'll try QE on my shoulder! Given this record high overnight we thought we'd quickly detail how far the other major markets are from their record highs for comparison.
The S&P 500 is now -1.6% from its peak (Sept ’07) whilst in Europe, the UK FTSE is -7.2% from the highs (Dec ’99) while the DAX is -2.9% (July ’07). Peripheral Europe is faring much worse though. The IBEX is now only worth about half of what it was at its November 2007 peak whilst the FTSE MIB has taken roughly a 70% haircut from its all time highs in March 2000. The CAC is not doing that much better with current levels also being half of its peak in September 2000. Emerging market performance is mixed. China, Brazil, Russia and India peaked in Oct ‘07, May ‘08, Dec ‘07 and Nov ’10 respectively and they are now 62%, 24%, 25%, and 8% from their historical highs. We have to also mention that Japan is now only 30% of what it was back in the Dec 1989 heydays (ie -69% from the highs). So the world has seen fairly big divergences in recent years and the US is leading the pack in the recovery due to extraordinary levels of fiscal and monetary stimulus.
Some of the other markets may not pass their peaks for many, many years to come showing the stress that's still present elsewhere. Interesting times. Returning to yesterday’s US session, the buoyant mood was helped by strong gains in technology stocks including a 2.65% rise in Apple stocks. The tech-giant was said to be readying updates to the iPad and iPhone to be released in the spring and late summer respectively. Data-wise, the non-manufacturing ISM came in a touch better than expectations (56 vs 55) with DB’s Joe Lavorgna pointing out that it was the highest reading since February of last year. Importantly, the employment component of the report was little changed from last month's postrecession high (57.2 vs. 57.5) which bodes well for Friday's payrolls report.
Commodities had a fairly strong session too, with copper (+0.4%), brent (+1.4%) and platinum (+1.3%) seeing solid gains, boosted by the headlines from yesterday’s National People’s Congress in China.
Overnight in Asia, we’re seeing the second straight day of gains in equities. The standout performer in has been the Nikkei (+1.9 %) which has hit new YTD highs as the BoJ begins its two-day meeting today. The meeting will also be the last for
the current governor, Shirakawa, who will step down from his post in 2 weeks time.
Also in Japan, the NHK has reported that Samsung may invest JPY10bn in Sharp while Sharp would supply LCD panels to Samsung. The deal is also now 20% cheaper for Samsung since the October last year following the sharp decline in JPY against the Won. In China there are some more positive headlines as leaders meet at the National People’s Congress. The head of China’s National Development and Reform Commission said that the country has large scope to boost domestic demand and infrastructure investment underpinned by China’s urbanisation drive. Meanwhile, the PBoC’s deputy governor was quoted as saying that the yuan will be made more flexible but that it is very close to equilibrium. The Hang Seng (+1.0%) and Shanghai Composite (+1.1%) are pacing gains overnight. Elsewhere the UST 10yr yield has only risen 2bp over the last 24 hours to 1.90% as we type, showing some remarkable resilience to the risk rally that we are seeing now. In currencies, the AUDUSD is testing the 1.03 level (+0.3%) after the release of Q4 GDP which came in line with consensus at 0.6%qoq.
In terms of other news flow, it was announced that Venezuela’s President Hugo Chavez had passed away overnight after a battle with cancer. Vice President Maduro will serve as interim president until the next election which must be held within 30 days. In a national address in December last year, Chavez reportedly called on Venezuelans to unite behind Maduro as his successor. In terms of the market reaction, Venezuela’s 5yr CDS were marked several basis points wider as were the yields on the country’s 2027 bonds (Bloomberg) – although confirmation of Chavez's passing first hit the wires after most US markets had closed.
According to Moody’s, the death of Hugo Chavez will not have an immediate effect on Venezuela's sovereign rating but the political transition will be key to any possible rating changes.
Looking at the day’s data calendar, in the European timezone we have the second estimate of euro area Q4 GDP. In the US, January factory orders and the Fed’s Beige Book are scheduled. But the highlight will be the ADP employment report in the US which will help refine estimates for Friday’s payrolls.