With no macro data on the docket (the NAR's self promotional "existing home sales" advertising brochure is anything but data), the market will be chasing the usual carry currency pair suspects for hints how to trade. Alas, with even more ominous economics news out of Europe, and an apparently inability of Mrs Watanabe to breach 100 on the USDJPY (hitting 99.98 for the second time in two weeks before rolling over once more), we may be rangebound, or downward boung if CAT shocks everyone with just how bad the Chinese (and global) heavy construction (and thus growth) reality truly is. One asset, however, that has outperformed and is up by well over 2% is gold, trading at $1435 at last check, over $100 from the lows posted a week ago, and rising rapidly on no particular news as the sell off appears to be over and now the snapback comes and the realization that Goldman was happily buying everything its clients were selling all along.
Curiously the other outperforming asset class in the overnight market are Italian BTPs, whose yield was slide by another 11 bps to 4.11% on hope the reelection of the 87 year old Napolitano as president on the 6th round of voting will end the gridlock plaguing Italian politics [26], bring some sort of political compromise to the country as well as a grand alliance. Yet another one of those "we will believe it when we see it" events, especially with the implosion suffered by the Democratic Party over the weekend.
Speaking of Europe, there was little other good news. ECB's Weidmann told FAZ that monetary policy must focus on inflation, hardly news the Buddhist monetarists (all about the here and now, tomorrow never comes) wanted to hear on a monday morning. Adding to the worries of the EUR bulls, Bonnici echoed Weidmann from last week, adding that a rate cut would have "limited impact", an outcome further justified by Asmussen who said a rate cut is possible if justified by the data. This explains the inability of the EUR to catch any bid in the overnight session. The final hammer in the European economic coffin came from the Bundesbank which said that "sluggish industrial production and cold winter weather" may have delayed Germany's economic recovery [27]. Yep: the weather is to blame again.
Adding substantial pressure on the future of Europe was news overnight from Handesblatt that the German anti-Euro party would gain 19% of the political vote.
Finally, rounding off the picture, was the update that Euro-Area government debt rose to a record 90.6% of GDP in 2012. How did the Keynesians react to this news? "Not Nearly Enough!"
A quick look at European markets:
- Italian 10Y yield down 11bps to 4.11%
- BTP/bund 10Y spread -12bps to 285bps; earlier hit 2-mo. tight at 280bps
- Spanish 10Y yield down 7bps to 4.56%
- U.K. 10Y yield up 4bps to 1.7%
- German 10Y yield up 1bp to 1.26%
- Bund future down 0.03% to 145.98
- BTP future up 0.82% to 113.93
- EUR/USD down 0.05% to $1.3046
- Dollar Index up 0.08% to 82.78
- Sterling spot up 0.06% to $1.524
- 1Y euro cross currency basis swap up 1bp to -21bps
- Stoxx 600 up 0.78% to 287.43
SocGen's summary of key macro events to watch out for:
Headlines from Italy over the weekend are delivering a positive impetus for cross asset markets as the week gets underway, with periphery debt the main beneficiary and 10y BTP yields slipping closer to 4.00%. This has not translated into higher EUR/G10 which says quite a bit over EUR sentiment and a bias to focus on the USD side of the equation especially with a raft of US data including GDP looming this week. The wealth effect is finally helping support the US housing market. After sending long-term rates into a nosedive, now that households have deleveraged (SG report), and as US stock markets recently hit their highest points since 2007, the wealth effect of US households is being rebuilt. This should be reflected in existing home sales today.
This probably creates some hope for the outlook for domestic demand, and thus supports our call on the Fed. However, the Fed is in no hurry to put a stop to its asset buying policy (currently $85bn/month). As a reminder, retail sales reported on 12 April disappointed, but this week's data rush will provide a fresh angle.
The situation is not at all the same in the eurozone, with very different leverage and wealth effects. Given the unemployment rate of 12%, household confidence to be reported today will unfortunately most likely reaffirm the bleak economic situation. Against this backdrop, it is tough to be optimistic on the capacity of European households to boost business morale. Output growth has stalled, thus the ECB is having a hard time finding a satisfactory solution right now in overcoming a fragmented North/South divide. Speculation on another rate cut will not go away especially after Weidmann's comments last week: most participants who have floated this possibility of more stimulus are nevertheless doubtful that it would have a big impact on activity.
That said, this just bolsters our scenario in the medium term for a drop in the EUR/USD, and an underperformance of the US bond markets vs EUR bond markets in H2 2013.
The news cycle from this weekend via DB's Jim Reid
Just over 20% of S&P500 companies have reported earnings thus far, represent about one-third of the index’s market cap, and we’re starting to get a clearer picture of how the reporting season is panning out in the US. As we mentioned in last Friday’s EMR, we are seeing a large divergence in terms of the EPS and revenue performance. Of the firms that have reported so far, the beat/miss ratio for earnings is 71%:27% (2% in line). However the beat/miss ratio for sales is currently tracking under 50% (currently 48%:52%). This is clearly a weaker performance versus the 64% sales beat ratio in Q4 2012 but slightly better than the 42% and 41% in Q3 and Q2 of last year so this is not a new trend. For the record, current Q1 EPS beats are not too dissimilar to what we saw in Q4 (74%), Q3 (72%) and Q2 (71%) of last year. It does seem that the stronger Dollar and perhaps weak European activity are having a drag on top line numbers this time round but our US equity strategist David Bianco also noted that net interest margin pressures (on banks), flattish commodity prices, and still soft capex conditions are all reasons behind the sales weakness. By industry, Financials, Healthcare, Industrial and Tech are having the weakest sales beat ratios this reporting season.
It is still early days for Europe but we are also witnessing a similar trend here. Of the 40-odd Stoxx600 companies that have reported so far, 60% of those have beaten EPS estimates but less than 40% have been able to do so on the top line. Stoxx600 EPS beats have ranged between 55%-58% in the last four quarters so the current run-rate is not far off that. Sales performance has been typically the bright spot though for Europe given a 60%-plus beat ratio (other than Q3 12’s 54%) in the past year so we’ll see how European sales stats unfolds this time round. Our usual earnings tracker table is included in the PDF of today’s EMR. Staying on this theme its worth highlighting that we are also moving into one of the peak reporting weeks in Japan. Over 50 Nikkei firms are lined up to report this week, which represents about 32% of the index’s market capitalisation. Japan clearly has been one of the bigger macro stories this year and with the Nikkei being a global outperformer to date, corporate fundamentals may eventually need to show signs of improvement to support the rally. We’ve seen 8 Japanese firms report so far of which 6 have beaten sales estimates but only half topping EPS consensus. The Nikkei’s sales beat/miss ratio for the corresponding quarter was an unimpressive 49%/51% although EPS performance was solid at 63%:37%.
Clearly its early days still but we have an interesting few weeks ahead to see what a 9% depreciation of the JPY during the 3 months of 2013 will do to corporate results. For what it’s worth, a 11% decline in the Yen between October-December of last year seemed to have done little for top line. Maybe there's a J-curve impact and the fruits of the Yen devaluation will come through more as we move through the year.
Turning to some of the weekend headlines, perhaps the most significant news of note was the re-election of Giorgo Napolitano as President of Italy. Napolitano becomes the first Italian president to be given a second seven-year term after reluctantly accepting a plea from the Democrat Party along with caretaker PM Mario Monti and Silvio Berlusconi to stand again. DB’s Marco Stringa thinks that markets will react positively, even if Napolitano reflection is a symbol of the fragmentation within the Italian political system. On the positive side, the market should be relieved that the risk of elections in the summer should be avoided and that finally a new government can be formed. Indeed, they see Napolitano’s reelection as an implicit commitment by the centre-left, centre-right and Monti’s Civic Alliance to support the formation of a grand-coalition government sponsored by Napolitano. On the negative side, the Presidential election process sends a message of political fragmentation. The fragmentation across parties in the Parliament was already well known, but the dramatic fragmentation within the centreleft Democratic Party was a negative surprise. Napolitano’s election comes after Bersani’s other candidates former PM Prodi and Franco Marini faced opposition from within Bersani’s own coalition. Given the political fragmentation, DB’s central case scenario is a government timeframe of just one or two years.
Early elections in October 2013 cannot be excluded, but now they appear much less likely now. The big question for the new administration is whether they have the appetite and political will to push through much needed economic reforms. An interesting few months still await even if the risk of fresh elections should have receded.
The G20/IMF/World Bank meeting wrapped up over the weekend, with the G20 simply reiterating its pledge to avoid competitive devaluation and saying that the BoJ’s monetary policy is “intended to stop inflation and support domestic demand”. Shortly after the meeting the BoJ’s Kuroda told reporters that “Winning international understanding gives me more confidence to conduct monetary policy appropriately. We will continue our qualitative and quantitative easing for the next two years”. The yen is a touch weaker against the dollar this morning (+0.2%) after depreciating 1.4% last Friday. Meanwhile the Nikkei (+2.1%) is off to a strong start to the week as the G20 hasn't really leaned on Japan to be more circumspect.
Elsewhere in Asia, markets are broadly stronger with most equity indices trading about half-a-percent higher overnight. The Shanghai Composite (-0.4%) is the main underperformer as Insurers were led lower by news of the Sichuan earthquake that saw at least 188 fatalities and over 11,000 injuries. The death toll from H7N9 avian influenza has also climbed to 20 (out of 102 confirmed infections) in China. WHO experts suspected human transmission ‘in very rare cases’ but this is clearly still an open issue for markets to keep a close eye on.
As newsflow from the Korean peninsula starts to fade there have been some snippets from the Middle East. In a week-long visit to the Middle East, US Defence Secretary Hagel pressed an American agenda on Sunday focused on deterring Iran (including a new weapons deal for Isreal) coupled with caution that it would be premature for Israel to opt for unilateral strikes on Tehran's nuclear program. Mr Hagel however on Sunday acknowledged that there might be 'minor' differences between the US and Israel on the timeline in which Iran might develop nuclear weapons (NYT).
Looking in more detail at this week’s calendar, in the US the highlight is Friday's advance Q1 GDP reading. Consensus is calling for GDP growth of 3%. Outside of GDP, we have existing home sales today followed by new home sales tomorrow and durable goods orders on Wednesday.
In Europe, tomorrow’s flash PMIs for April will be the most closely watched data point for the week. Outside of that we have advance Eurozone consumer confidence numbers for April later today, Germany’s IFO survey tomorrow and on Friday we have March credit aggregates. The UK will report Q1 GDP on Thursday.
In Asia the BoJ’s meets on Friday – and with all the major announcements last meeting, there should be no major surprises from the central bank this week. However the BoJ will be updating its economic and inflation forecasts for 2013 and 2014 this week. In China, flash manufacturing PMIs are scheduled on Wednesday.
