There was little in terms of overnight newsflow to spook algos, but the tone is decidedly sour this morning following a lack of either the now traditional Japan or Europen-open buying ramps. The primary reason for this may well be the ongoing decline in the USDJPY which failed to breach the 100 barrier yesterday, coming as close as 99.95 before the Mrs. Watanabe onslaught had to be called off despite some more jawboning from Kuroda whose headlines are now summarily ignored, and which appears to have set a line in the sand for Japan, whose market naturally closed lower following this strengthening in its currency. Similarly troubling was the dip in the SHCOMP which closed down -0.58%, this despite the epic M2 and credit injection reported yesterday: if new liquidity can't send the market higher, what can?
Then moving to Europe, the other recently short-squeezed carry funding pair EURUSD has been selling off all night as well, dropping well under 1.3100 not helped by yet another weekly extension in the Cypriot capital controls, where additionally there was some confusion as to whether the country would request an extension in its €10 billion Troika loan, which Germany had previously said would never happen. Naturally, after this rumor was floated and there was little market enthusiasm, it was summarily rejected by the Cypriot finance minister although the question of where the country will get the required €6 billion in additional bailout cash remains very open. Finally, completing the circus that is Europe, Spain's Catalonia region which may or may not be independent soon, said it was impossible to implement the cuts needed to achieve 2013's deficit target.
End result, equity futures down, at least for now until the EURUSD and USDJPY stop lifting algos are asleep, TSYs up, and gold getting the usual am poleaxing. JPM and Wells are set to report today, and we algo get preliminary University of Michigan consumer confidence report for April, advance retail sales for March and producer prices.
SocGen provides the macro Outlook for today:
It has been an odd week in many respects, one where currencies of central banks engaged in asset buying programmes like the JPY and the USD have underperformed while the currencies of central banks no (longer) expanding their balance sheets (or due to carry or commodity characteristics) have done well. Risk assets have experienced a solid week generally speaking, with the Itraxx tightening by 10bp and US stocks hitting new all-time highs. At the same time, macro surprises have turned negative in the US, and inflation and exports in China are slowing. So are risk assets in denial? And why are core bond yields not backing up? We have seen this bifurcation between asset classes before, even when soft patches in the economy have occurred, but when central banks like the Bank of Japan take the meaning of reflation policy to a different level (monetary base to double to 50% of GDP by 2015), it is difficult to argue against what we are observing. The question is how long this can be sustained as metrics like growth and rate differentials are disregarded. How can you otherwise explain the performance of the AUD (lower rates following a softer jobs report), or the squeeze in EUR/USD above 1.31? If today's EU finmin meeting takes place without political wrangling over the debt maturity extension plan for Ireland and Portugal, short-term targets for EUR/USD will have to be raised. The more subtle point however in today's discussions in Dublin is whether a second Portugal bailout is necessary to cover increased financing needs starting in 2014 and running until 2020. This will not sound like music to the ears of EUR bulls and could present Troika officials with another PR and political nightmare that Germany is keen to avoid. As things stand, the shortfall in the Portuguese 2013 budget, estimated at around 0.8ppts by Moody's, makes it difficult to deliver necessary fiscal adjustments and comply with the conditions for the ECB OMT. Keep an eye on short-dated PGB yields over the coming days. The data calendar today brings US retail sales and Michigan consumer confidence.
And the full overnight recap comes as usual from DB's Jim Reid
Earnings season for the US banking sector kicks off today with both JPMorgan and Wells Fargo reporting before the opening bell - setting the tone ahead of next week’s results from Citigroup, Goldman Sachs, BofA and Morgan Stanley. In terms of consensus estimates, the street is expecting for JPMorgan to report earnings of $1.39 per share, or 6% higher than the prior corresponding period. We note that expectations for 1Q EPS have crept up steadily over the last few months, but the bank has a record of beating earnings estimates having done so 11 times out of the last 12 quarters. For Wells Fargo, consensus is for earnings of $0.89 per share, or growth of 18% relative to the same quarter last year, although slightly softer than the 20% earnings growth which the bank delivered last year. The stock prices of JPMorgan and Wells Fargo have risen 12% and 10% respectively this year, pacing a 10% gain in the S&P500.
Back to yesterday’s markets and the focus was on the better-than-expected US jobless claims (346k vs 360k expected and 388k last week) which underpinned an early rally in US equities. The Department of Labor said the waning of seasonal distortions drove the large decline in jobless claims. DB's economists had already discounted much of the backup in jobless claims over the previous few weeks because of the Easter holiday and believe the better jobless claims provide some support to the view that the economy is not witnessing another midyear growth stall, but instead merely a weather or sequester-driven soft patch.
The S&P500 ended with a gain of 0.36% despite some jitters on the back of underperformance in tech stocks (-0.72%). Reports of weak demand for PCs and smartphones sent tech heavyweights including Microsoft, Hewlett-Packard and Intel 4.5%, 6.5% and 2% lower on the day respectively.
Nevertheless, the S&P500 closed within 7 points of the 1600 level as it marked yet another record high. The Euro (+0.2%) continued its recent spike against the dollar, closing just shy of the 1.31 mark. Credit had another solid session with the European iTraxx, Crossover and CDX IG closing 2bp, 14.5bp and 0.5bp tighter on the day as they reach the pre-roll tights seen in March. In commodity markets, oil continues to decouple from other asset classes with Brent closing 1.4% lower after the IEA cut their forecasts for global oil demand, bringing the last two week’s losses for crude to 6%.
Turning to Asia, the Nikkei (-0.5%) is lagging on profit-taking after a week that has seen the index gain 10%. The KOSPI (-0.7%) is also underperforming amid reports that the Pentagon believes that North Korea has the ability to place miniaturized nuclear warheads on missiles (AFP). On that note, Deutsche Bank is hosting a special call on North Korea titled “No Way Out?” with Professor Victor Chua, Director of Asian Studies at Georgetown University. Details of the call are included at the end of today’s EMR.
Rounding off the main headlines, ahead of today’s Eurogroup meeting Eurogroup President Dijsselbloem confirmed that the troika are discussing a possible extension to the Irish and Portuguese bailout programs. Confirming what Reuters reported on Tuesday, Dijsselbloem said the troika made a proposal for a seven-year extension, which he hopes will be finalised at Friday's Eurogroup meeting.
Cyprus returned to the headlines after a government spokesperson confirmed on Thursday that the cost of its EU-IMF bailout has increased to EUR23bn from EUR17.5bn. Details on how the additional EUR6bn will be funded are not clear. The blowout comes as the projected fiscal needs of the state have increased as a result of the deeper-than-expected recession. With the increase in the size of the bailout, Cyprus will now be receiving a bailout that is larger than the size of its GDP. In 2012, Cyprus' GDP was just under EUR18bn, meaning the bailout is approximately 128% of GDP. Expect to hear more on this at today’s ECOFIN.
Turning to the day ahead, we have a full data docket in the US with the preliminary University of Michigan consumer confidence report for April, advance retail sales for March and producer prices. The two-day Eurogroup/ECOFIN meeting begins today. Bernanke delivers a keynote address at the Resilience and Rebuilding for Low-Income Communities Conference. He will make prepared remarks and will not take questions. JPMorgan and Wells Fargo’s earnings are scheduled for midday and 1pm London time respectively.