With the entire world's attention focused on Boston, the FX carry pair traders knew they had a wide berth to push futures, courtesy of some EURUSD and USDJPY levitation overnight, which started following news out of Japan that the G-20 would have no objection [26]to its big monetary stimulus - of course they don't: they encourage it: just look at the levitation in the global wealth effect stock markets since it started. The Friday humor started early: "Japan explained that its monetary policy is aimed at achieving price stability and economic recovery, and therefore is in line with the G20 agreement in February," Aso told reporters. "There was no objection to that at the meeting." "We explained (at the G20 meeting) that we're convinced that the measures we're taking will be good for the global economy as they will help revive Japanese growth," Aso said. And by global economy he of course means stocks. Shortly thereafter, when Europe opened, the real levitation started as someone, somewhere had to offset what would otherwise be a 100 point plunge in the DJIA just on IBM's miserable results alone. Sure enough what better way to do that than with a wholesale market "tide" offsetting one or two founder boats.
A bulletin summary of the remaining news from Bloomberg, as irrelevant as it may be, in a world in which two currency pairs are set by the G-7 central banks, determine the level of all global risk assets.
- Democratic Party leader Bersani turned to former Prime Minister Prodi as a candidate for the Italian presidency after members of his party rejected his first choice, rupturing a rapprochement with Berlusconi; Bersani May Quit as PD Head After President Vote: Repubblica
- Kim Jong Un, “firmly in control” of the North Korean regime, isn’t ready to negotiate about ending his nuclear and missile programs, according to the top U.S. military intelligence official
- Global sovereign yields higher, led by Finland, Germany and Denmark. EU sovereign spreads to Germany tighter
- Nikkei +0.7%; other Asian stock markets decline. European equity markets, U.S. index futures rise. Energy futures, precious metals higher
European Market summary:
- Spanish 10Y yield down 5bps to 4.62%
- Italian 10Y yield down 5bps to 4.21%
- U.K. 10Y yield up 3bps to 1.69%
- German 10Y yield up 3bps to 1.25%
- Bund future down 0.18% to 146
- BTP future up 0.29% to 113.07
- EUR/USD up 0.31% to $1.3091
- Dollar Index down 0.13% to 82.45
- Sterling spot up 0.43% to $1.5345
- 1Y euro cross currency basis swap up 1bp to -21bps
- Stoxx 600 up 0.73% to 285.8
FX:
- JPY underperforms all G10 counterparts after Japan seen avoiding G20 criticism over recent yen weakening; -1.9% vs NZD, -1.6% vs SEK, -1.4% vs EUR, -1.0% vs USD
- USD underperforms 9 of its G-10 peers, -0.8% vs NZD, -0.3% vs EUR; DXY -0.1% at 82.45
- USD/JPY has been most significantly correlated with 2Y JGB in past month, with JPY weakening versus USD when yields have fallen, according to correlation studies
- EUR/USD has been significantly correlated with S&P500 index and 10Y UST yield, with EUR falling as 10Y yields have declined, according to correlation studies
- “The comments from Finance Minister Aso that the plans are seen as unopposed, clearly was a trigger point” for yen selling, said Jeremy Stretch, head of currency strategy at CIBC in London
Key macro events to look for today via SocGen:
Emerging market currencies have been under pressure all week, suffering pretty heavy losses with commodity- and thus growth-linked currencies in particular doing badly. The chart of the day shows weekly losses ranging from 1% for the MXN to 3% for the ZAR. At the other end of the spectrum, the THB and INR have gained 1%, and the CNY is also up modestly after the fixing reached a new high vs the USD at 6.1699. There has been speculation (aimed to coincide with the G20 and IMF spring meetings?) that the PBoC may widen the trading band over the weekend which could slow the appreciation of the CNY, a desirable policy objective to counter the ongoing slowdown in the economy (Q1 GDP growth dropped to 7.8% yoy). This policy step would be validated by the benign inflation backdrop. As our EM colleague Wee-Khoon Chong writes on p.6 in the FX weekly, there is a case to be made to keep the CNY stable in a time of uncertainty.
The G20 finmin meeting is set to conclude today, but we should not expect major announcements or implicit condemnations of members pursuing strategies of competitive devaluations to gain an unfair trade advantage. The draft report indicates that the G20 will withhold direct criticism of Japan. ECB's Weidmann will speak before or after the meeting, and another veiled statement on the direction of euro interest rates could be seen as bolstering the case for more policy stimulus in the months ahead. His dovish comment earlier this week did not pull the rug out from under the euro and in fact put it in the top three best performing G10 currencies this week. The rankings should not change materially today, with the release of Canadian CPI perhaps bringing another opportunity for the EUR/CAD to push for a test of the March 1.3539 high..
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The full overnight summary from DB's Jim Reid:
The big question in markets at the moment is whether this will be a fourth year of markets facing a setback around this time of the year. In 2010, the S&P500 fell 16% in a slide that began in April and ended three months later in July. In 2011, the S&P500 peaked again in April and then lost 19% before bottoming in September of that year. Finally in 2012, we saw a fall of 10% that began in early April and ended in early June. So since 2010, we’ve had what feels like a mini cycle that starts in April and has delivered an average 15% downward move in the S&P500. Our view continues to be that market will see a more negative Q2 as softer data disappoints. We do think the abundant Central Bank liquidity will limit the downside though.
Such softer data has helped to take its toll on markets this week and in addition its been a mixed start to Q1 earnings. We're about 20% of the way through for the S&P500, and although three-quarters of companies have so far beaten EPS expectations, under half have delivered better than expected top line performance.
Its still very early days in the European reporting season with only a handful of Stoxx600 companies having reported thus far, but initial results suggest a similar trend to that of the US. About two-thirds of companies have exceeded consensus EPS expectations but less than half have done the same on the top line. We’ll include our usual earnings season tracker data in Monday’s EMR. For the record yesterday saw a continuation of the earnings pattern that we’ve seen thus far. Of the 29 S&P500 companies which reported yesterday, an impressive 24 companies beat earnings estimates but more than half missed revenue expectations.
Back to markets, risk assets closed weaker for the second straight day after yet another round of disappointing US data. This time it was the Philly Fed which came in weaker both in the headline (1.3 vs +3.0 expected) and in the detail. It follows the below-expectation Empire manufacturing survey on Monday. In other data, jobless claims ticked up a touch to 352k (vs 350k expected and 348k previous week). European equities initially traded stronger at the open, buoyed by a solid Spanish auction and news that the German parliament had approved Cyprus’ bailout programme. But markets turned later in the day on the weight of some mixed results from Morgan Stanley, who recorded a 20% drop in FICC trading revenue, and after it became clear that the Italian parliament had failed to elect a new president thanks to a split in Bersani’s coalition.
The Eurostoxx managed to cling onto a gain of +0.08% but the S&P500 fell by 0.67%. Outside of equities credit markets showed some resilience in the face of the weakness in equities, with solid activity in the primary markets and secondary markets only closing a touch wider. 10yr UST yields were broadly unchanged at 1.68% and gold (+1%) rallied for the third straight day.
Periphery bond yields initially traded lower early in the session after a solid Spanish bond auction, but sold off later to finish largely unchanged on the day. After the recent tumble in Apple’s share price, including a 2.7% drop yesterday, the tech giant has now well and truly lost its title as the largest company by market cap to Exxon Mobil. Exxon owes that crown more to Apple’s 44% drop since its September peak, than to its own share price performance which has been mostly range bound during that same period. More broadly, we’ve seen a sizeable underperformance in US tech stocks this year with the tech sector virtually flat YTD against an 8%+ gain in the broader S&P500. We should note however, that most of underperformance has come in recent weeks probably driven by news of poor demand for smartphones/PCs and disappointing earnings updates from the likes of Yahoo! and eBay. Nevertheless, it will be interesting to see whether this divergence continues throughout the remainder of the reporting season.
Turning to the overnight session, markets are showing improved risk appetite with the most Asian bourses up around 1% led by gains in the Hang Seng (+0.9%) and Shanghai Composite (+1.4%). S&P500 futures bottomed towards the close of the US session and are trading 7pts better during the Asian timezone. USDJPY jumped 0.3% after Japanese finance minister Aso said that no one opposed Japan’s policies at the G20. BoJ Governor Kuroda said he intends to explain to fellow members of the G20 that the central bank’s monetary policy isn't aimed at cheapening the yen. Brent and gold continue to rally overnight, but copper is 2.5% weaker.
In other headlines, the US 10yr TIPS breakeven rate had its largest daily fall since November 2011 (-9bp to 2.27%) as fears of inflation wane in light of the recent weaker economic data and drop in commodity prices. The 10-yr breakeven rate is hovering at a near eight month low. Bloomberg reported that yesterday’s 5yr TIPS auction attracted the lowest bid-cover ratio (2.2x) since October 2008, although the article noted that a record $18bn of notes were auctioned.
Looking at the day ahead, Spanish trade numbers and industrial orders for Italy are the main highlights on an otherwise thin data docket. The presidential election in Italy and the G20/IMF/World Bank meeting in Washington are the key events to watch for today. McDonalds and General Electric report before the US market opens.