The driver of today's episode of "make the futures levitate" is not so much a rise in the EURUSD as Europe reopens - a very unhappy Europe where Italy's Monte Paschi was already halted down once on news from this weekend it was the first peripheral bank to suffer a depositor "run" - but curiously the USDJPY which after tumbling to under 93 and pushing the Nikkei 225 down by another 1% to just over 12,000 has been ramping gradually all morning to end well above the start of Japanese trading and was back to 93.25 at last check. It certainly is not the European economic news which continue to be about depressionary and getting worse.
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To recap: fresh unemployment record at 12%, final manufacturing PMIs well into contraction and getting worse especially for the doomed PIIGS: Italian PMI dumping even more to 44.5 vs Flash 45.4 and down from 45.8 last, Spain PMI crashing to 44.2, vs flash 46.2 and 46.8 last, UK 48.3 vs Flash 48.7, Germany 49.0 vs Flash 48.9 down from 50.3; France 44.0 vs Flash 43.9 and so on, rumors that the Cypriot Finance Minister is about to be sacked, and most disturbingly, the Slovenia central bank vice-governor Fabijan said that "Slovenia must start credible measures to avoid aid." Where was the last place we heard this.... Oh, yes, Cyprus. The same Cyprus, which paradoxically, is presented by some as the reason for the overnight "rally", with pundits attributing the Troika's "easing" of MOU terms by pushing back the fiscal target from 2016 to 2017 as reported yesterday. How that is even remotely news is shocking since none of the actual austerity measures themselves have been eased. But any goal seeked narrative is fair in the central banks' intervention in the farce formerly known as the "market."
SocGen highlights the things to watch out for today:
One of the lowest volume days of the past 12 months was reported yesterday for G10 fx so we are inclined not too read too much into the price action off the last 24hours, though the minor bid in JPY (USD/JPY below 93.00) is quite remarkable timing wise ahead of this week's BoJ meeting. It is perhaps telling of the formidable task facing governor Kuroda to spring a dovish surprise and fire up the bearish JPY trade. Absent of that, the surprise drop in the weak US manufacturing ISM (new orders down by 7pts) and the talk of upward revisions to Spanish deficit projections for this year are leaving investors with a somewhat bitter taste as a new month and quarter get underway as Cyprus stays in the rear view mirror. The Eurostoxx index gained 5% in Q1 marking a third successive quarterly gain. EUR/USD ended Q1 down 2.9%, marking its first loss in three quarters. Will Q2 be any better? In Q2'12, EUR/USD logged a 5.1% drop, its worst quarterly performance last year.
If most G10 currencies are oscillating within familiar ranges, it is the bond market that is capturing our attention, with 10y bund yields yesterday having breached the December'12 low of 1.258% and the 10y Oat/bund spread widening out to 75bp, the highest level since last November. Will the short-term correction reverse on payrolls?
This week is about central banks - the RBA left rates unchanged overnight - the ECB, BoJ and BoE are scheduled to announce their policy decisions on Thursday. On Friday we get US payrolls. Weak manufacturing PMI data from the eurozone this morning would rekindle expectations of fresh ECB stimulus.
Finally, the full overnight recap from DB's Jim Reid:
Following on from the weaker data, today's European PMI numbers are going to be important. The flash numbers were fairly weak so expectations have been managed but as a minimum it will be interesting to see the first read of the Italian and Spanish numbers. The poor US ISM raised the question as to whether the post Great Recession seasonal trend of strong Q4/Q1s and weak Q2s/Q3s might re-establish again this year. It’s too early to say and for now many are blaming the sequester for the dip with expectations that there will be a bounce back next month. One thing that the weak ISM has done is that it has reduced the gap between this and the French PMI which over the last couple of months has been at record wide levels. The gap between the US and the overall Euro-Zone number has also been close to record wides recently.
The US has out-performed Europe consistently since the GFC but it hasn't been immune from the former's economic and funding woes. So maybe the lack of recovery in Europe is holding the US back a little again?
Despite the Easter-shortened week we have a blockbuster few days ahead for central banks and economic data. On the central banks, Thursday’s BoJ policy announcement will be keenly watched given it’s the first meeting with Haruhiko Kuroda at the helm. Market expectations are that the central bank will unveil new and aggressive monetary policy measures under Kuroda’s leadership. Indeed, amongst the options on the table are extending asset purchases to longer-dated JGBs, boosting purchases of riskier securities, eliminating the “bank note” rule and simplifying the structure of asset purchase programs. The ECB and BoE also meet on Thursday. The market isn’t expecting a change in policy from the ECB, but Draghi's post-meeting press conference will be interesting in light of the recent events in Cyprus and the seemingly disappointing European data of late.
In terms of economic data, this week's main focus will be on Friday’s US payrolls report for March. Market expectations have been slowly drifting upwards in the recent week and currently stand at +199k gain in the headline, +205k in private payrolls and for unemployment to remain at 7.7%. Wednesday’s ADP report will be the last major employment data point ahead of payrolls Friday. A number of Fed speakers are scheduled through the week but the highlight will be on Fed Vicechair Janet Yellen's speech at George Washington University on Thursday.
Coming back to weekend’s developments, there has been a fairly constant flow of news from the Chinese real estate market over the last few days. Seven local Chinese governments including Beijing and Shanghai became the latest group of cities to implement the central government’s real estate cooling measures which include a capital gains tax on secondary transactions, additional home purchase restrictions and tightening of real estate credit. As DB’s Chief China economist Jun Ma writes, of the seven cities, only Beijing made the 20% capital gains tax relatively explicit while all the other cities remained ambiguous on the implementation details. Overall, he believes that these local policies are broadly in line with expectations. Policies in a few major cities will continue to evolve depending on price trends. For most tier 2 and 3 cities, policies and property prices will likely remain stable in his view. The cooling measures come amid data published yesterday which showed that Chinese home prices rose 1.1% m.o.m. in March across 100 major cities - the biggest gain in more than two years.
Staying in the region, risk assets are trading with a mixed tone with gains seen on the Hang Seng (+0.1%) and ASX200 (+0.3%) while the Shanghai Composite (-0.4%) and Nikkei (-0.8%) trade lower. The Nikkei has been weighed by a stronger yen overnight (+0.4%) but the index has recovered from the earlier lows of -2.7% after BoJ governor Kuroda reiterated to a parliamentary budget committee overnight that he was "determined to take bold measures both in terms of quantity and quality to hit the 2.0% (inflation) target at the earliest possible time." The KOSPI (-0.85%) is also underperforming, with news reports that the US has positioned a warship off the Korean coast as a shield against a potential ballistic missile attack from North Korea (Reuters).
In terms of other weekend news, Cypriot banks reopened last Thursday albeit with a number of capital controls. By Friday, banks had returned to their normal working hours and reports suggested that there were no longer long queues at banks. Bank of Cyprus depositors could lose up to 60% of their uninsured deposits under bank restructuring plans according to Cypriot officials. Reports suggest that 37.5% of deposits over EUR100k would be converted into shares. Up to 22.5% will go into a fund attracting no interest and may be subject to further write-offs. The other 40% will attract interest - but this will not be paid unless the bank performs well. Cypriot officials have also said that large depositors at Laiki could face an even tougher "haircut".
Turning to the day ahead, European manufacturing PMIs for March will be the key focus, particularly the first readings for Italy (45.3 expected) and Spain (46.2 expected). In the US, February factory orders and motor vehicle sales are the main data releases. Now onto our month and quarter-end performance review.