The only story this morning remains Bernanke's after hours speech, which solidly trumped the FOMC minutes in market impact, and which, in addition to ramping US equity futures to just about new all time highs, sent the EURUSD soaring by almost the same amount (+300 pips) as the actual QE1 announcement on March 18, 2009 [28]. Such is the power of verbal currency warfare, when Bernanke hasn't acutally done anything and merely hinted the Fed is as confused as ever about what to do. Of course, as Commerzbank notes this morning, the U.S. economy would have to lose a lot of momentum for the Fed to cancel tapering, and the central bank would only expand the purchase program if the economy collapses, but none of that matters to the "wealth effect" for the 1% where economic destruction simply means more wealth.
Obviously Bernanke’s comments underpinned a broad-based rally in risk overnight. Generally speaking, equities are higher, the dollar is lower against major currencies while EM assets are firmer across the board. Starting with equities, strong gains have been posted on the Hang Seng, Shanghai Composite and KOSPI. S&P500 futures are currently trading at +1% or 1664. In currencies, the USD index is down well over 1%. EURUSD is up 1% this morning after spiking 1.5% late yesterday as Bernanke spoke. The Australian dollar is also enjoying strong gains despite a mixed Australian employment report that saw the jobless rate edge up to 5.7% (vs 5.6% previous). 10yr US treasury yields are down 6bp to 2.57% in the overnight session. Yields are poised to close lower for the fourth straight day which has not happened since February this year. EM equities are also solidly firmer this morning.
The Bank of Japan last night raised its assessment of the economy, with Kuroda saying the economy is starting to recovery moderately, even as the central bank lowered its CPI forecast for both 2013 and 2014. Sadly with the Nikkei 225 linked to the USDJPY which tumbled on Bernanke's USD-crushing comments, it traded red for most of the session and only managed to eek out a feeble +0.4% in the last hour of trading.
In China, the SHCOMP ramped another 3.5% on both the Bernanke speech as well as comments from Premier Li and reports that regulatory relaxation in the property sector may be forthcoming. Xinhua reported that China may soften its stance on monetary policy after Li said the nation's economic growth and employment must stay above a certain floor. Elsewhere, the China Securities Journal reported that recent statements signal financing policies for property companies may be relaxed in the future, lifting the real estate sector.
In fact, the global Euphoria is so great that only Portugal appears to be in the red following overnight reports citing president Silva who said that the risk of the country requesting a new bailout package is considerable, especially since he refused to say when or if a cabinet reshuffle would take place implying the country is caught in a political vacuum. But Portugal is very much irrelevant in a world driven forward by central bank jawboning.
Crude continues to trade above $106 with Brent just a hair over $2 above it, and gas prices starting to move solidly higher and on pace to hit all time record highs for this time in the year.
The key overnight news highlights in bulletin format via Bloomberg:
- Treasuries gain as Bernanke said “highly accomodative policy” would continue “for the foreseeable future”; USD falls against all major counterparts, touching 3-week low vs EUR, declines below 100 vs JPY.
- The Fed chairman spoke just three hours after minutes of June FOMC showed about half of 19 participants wanted to halt QE by year end
- BOJ maintained course on its unprecedented monetary stimulus and upgraded its view of the economy, referring to a recovery for the first time since before a record 2011 earthquake
- China may soften its stance on monetary policy after Premier Li Keqiang said the nation’s economic growth and employment must stay above a certain floor, Nomura said
- Bundesbank’s Jens Weidmann said the ECB’s forward guidance to keep rates at current levels or lower for an extended
period of time “shouldn’t exclude that the benchmark rates will be raised in the future if inflation pressure becomes apparent” - U.S. and European financial regulators are poised to announce an agreement on how they’ll jointly oversee the $633t global swaps market, according to three people familiar with the deal
- Week’s Treasury auctions conclude with $13b 30Y bonds, yield 3.61% in WI trading; stopout yield at that level would be highest since August 2011
- Sovereign yields mostly lower; exceptions are Portugal, Spain and Italy. Asian stocks higher, Shanghai +3.2%, Nikkei +0.4%. European stocks, U.S. index futures gain. WTI crude falls, gold and copper gain
Markets snapshot:
- EUR/USD 1-Mo. Risk Reversals Keep Going Up as Spot Trims Gains
- Spanish 10Y yield up 7bps to 4.87%
- Italian 10Y yield up 4bps to 4.49%
- U.K. 10Y yield down 5bps to 2.37%
- German 10Y yield down 5bps to 1.61%
- Bund future up 0.3% to 143.01
- BTP future down 0.26% to 110.17
- EUR/USD up 0.6% to $1.3063
- Dollar Index down 1.15% to 83.08
- Sterling spot up 0.55% to 1.5097
- 1Y euro cross currency basis swap up 1bp to -17bps
- Stoxx 600 up 0.62% to 296.66
Socgen's summary of main macro catalysts
G10 currencies and rates traded in a range ahead of the FOMC minutes yesterday but it was fireworks after that and the Bernanke speech as the chart of the day illustrates. Fade Bernanke or not? The Fed is on track for tapering later this year, that is the view of ‘about half' of the FOMC members as we learned from the minutes published prior to Bernanke's dovish headline. The mortgage market (and hence the US housing market) in particular will breathe a sigh of relief after the minutes indicated that the Fed would not sell agency MBS as part of the normalization process. Clearly the USD had moved a long way helped along by dovish ECB, BoE et al but until we learn of slowing employment growth in the US, which so far has not been the case, the USD is an attractive buy at the overnight levels.
Bernanke's soothing words added even more suspense to the emerging markets and Turkey in particular where the central bank's failed intervention worth USD1.3bn to prevent a further weakening of the Lira caused interest rate volatility to jump. The 1y cross currency swap surged to over 8.00, extending the move from 6.54 on 1 July. USD/TRY has spiked over 10% since early May and with inflation accelerating to 8.3%, our colleagues from the EM team now see the risk of the central bank coming forward with emergency rate hikes to stop the currency from falling further as direct FX intervention fails to get any traction. The moves are reminiscent of 2011 when the overnight rate was hiked by 350bp between September and October. This story is certain to continue to make waves today.
In G10 we stay with a familiar menu of ECB speakers and US jobs data, though the Italian debt auction will garner close interest following the ratings downgrade yesterday by S&P to BBB. One-year bills were sold yesterday at 1.078% vs 0.962% at the June 12 auction. The downgrade was not without consequence for other periphery nations like Spain where the 10y bono/bund spread returned over 315bp. Comments by ECB member Coeure and Weidmann may bring some relief today with their comments adding to the list of council members who have reaffirmed and clarified the dovish stance since the introduction of forward guidance last week.
The relief bounce in CAD, AUD, NOK and SEK accelerated in the wake of Bernanke but there's no strong conviction to believe that the moves will stick for long. Currencies are off the overnight highs. With respect to the EUR, we continue to favour selling rallies vs the USD but are mindful of the support level at 1.2735 area which has proved very resilient since Nov-12, and after last night could take more time to break down. Seasonals favour a lower EUR/USD in July before enjoying pocket of relief in August.
DB with the remainder of the overnight recap:
The highly anticipated FOMC minutes left markets little changed as we all debated whether the latest set of minutes were dovish or hawkish. But there was much less ambiguity about the tone of Bernanke’s Q&A which came later last night in his speech in Boston. Indeed his comments, which were after US equity markets had closed, sent the dollar sharply lower against major crosses and the S&P futures soaring +1%. We’ll recap the FOMC minutes below but first we’ll review what was said by the Chairman himself.
The overall message from Bernanke was one of reassurance that “highly accommodative monetary policy” will continue “for the foreseeable future”. In terms of the Fed’s dual mandate Bernanke repeated the message that the Fed was not on target on its employment objectives, and low inflation signalled that more stimulus was needed. There was additional emphasis on low inflation when he said that the Fed remained committed to defending both an undershoot and overshoot in inflation. On the topic of fiscal policy, he added that it was too early to say whether the US had weathered the fiscal restraint in Washington - this perhaps ruling out the start of tapering in the summer. When asked if he would have done anything differently following the June 18th/19th FOMC, Bernanke indicated that he wouldn’t. He said the market volatility of the past six weeks could have been much worse if he had kept silent on their plans for tapering, misleading investors into thinking the asset purchases could go on forever. Another interesting part of the Q&A came when he discussed financial conditions. Here the Chairman said that financial conditions had tightened and it’s something that the Fed was watching. He added that “if financial conditions were to tighten to the extent that they jeopardise the achievement of inflation and employment objectives, then we would have to push back against that”.
Bernanke’s comments have underpinned a broad-based rally in risk overnight. Generally speaking, equities are higher, the dollar is lower against major currencies while EM assets are firmer across the board. Starting with equities, strong gains have been posted on the Hang Seng (+2.1%), Shanghai Composite (+2.3%) and KOSPI (+2.5%). As we go to print, S&P500 futures are trading at +1% or 1665. In currencies, the USD index is down 1.9% as we type. EURUSD is up 1.2% this morning after spiking 1.5% late yesterday as Bernanke spoke. The Australian dollar (+1.3%) is also enjoying strong gains despite a mixed Australian employment report that saw the jobless rate edge up to 5.7% (vs 5.6% previous). 10yr US treasury yields are down 6bp to 2.57% in the overnight session. Yields are poised to close lower for the fourth straight day which has not happened since February this year. EM equities are firmer this morning including in Indonesia (+2.1%). The
new Indonesia 10yr USD bond is trading more than a 1pt better in the secondary helped by a sold bid for EM credit this morning.
Coming back to the FOMC minutes, the minutes were initially thought of as being dovish judging by the market reaction, as the S&P500 rose to a session high of +0.35% shortly after its release. Probably driving that reaction was the line that “many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases”. Fed policymakers did not have the June employment data at the time of the meeting so it is possible that at least some of the FOMC members might be feeling more confident in the labor market outlook now than they were at the time of the meeting. A few minutes later, equities ticked lower and the S&P500 ended unchanged on the day as markets began focusing on the more hawkish elements of the minutes. Probably one of the more hawkish lines in the minutes was the line that “About half of participants indicated that it likely would be appropriate to end asset purchases late this year”. It would be fair to say that an end to purchases this year is an earlier time-frame than virtually all expect. So something for everyone last night but it ended on a dovish note.
Elsewhere overnight, the BoJ left its policy settings unchanged. The Nikkei (-0.7%) is a clear underperformer in Asian markets today weighed by the USD’s slide against the yen (-0.9% this morning after -1.5% yesterday). Governor Staying in Asia, there is increasing chatter about some form of stimulus plan or targeted policy support being formed by the Chinese government in order to prevent growth from slipping too much (Bloomberg). Chinese equities were boosted yesterday by reports that the PBoC could cut bank’s reserve requirement ratios in order to increase liquidity in the system. The recent events in the Chinese banking system took an interesting twist yesterday when the South China Morning Post reported that more than 1000 people had besieged the PBoC’s branch in Guangxi province after false reports had spread that the central bank would grant interest-free and subsidised loans to those who show a credit report.
The immediate focus of the day ahead will be the market reaction to Bernanke’s comments which came after Europe and US had shut. If the Asian market reaction is any guide, risk should do reasonably well today. There’s not much on the data calendar today outside of US jobless claims and US government’s monthly budget update. The next catalyst will probably be the start of the bank earnings season when JP Morgan and Wells Fargo report tomorrow.