While the market's eyes were fixed on the near record slide in Japanese Industrial Production (even as its ears glazed over the latest commentary rerun from Aso) which did however lead to a 1.53% jump in the PenNikkeiStock market on hope of more stimulus to get floundering Abenomics back on track, the most important news from the overnight session is that the PBOC's love affair with its own tapering may have come and gone after the central bank came, looked at the surge in 7 day market repo rates, and unwilling to risk another mid-June episode where SHIBOR exploded to the mid-25% range, for the first first time since February injected RMB17 billion through a 7-day reverse repo. The PBOC also announced it would cut the RRR in the earthquake-hit Lushan area. And with that the illusion of a firm and resolute PBOC is shattered, however it did result in a tiny 0.7% bounce in the SHCOMP.
In Europe, where the macro data has continued its downward trajectory (Spanish Q2 GDP -0.1% despite the rampant adjustment in economic numbers, Portugal June Industrial Production sliding following an jump in May) leading to an ever higher and ever more entertaining surge in Eurozone Confidence (print of 92.5 in line with expectations, up from 91.3 in June), it was the banks that made a splash with Deutsche reporting a big earnings miss (more on its results shortly), while Barclays proceeded with the previously announced GBP5.8 billion capital raising rights offering. One can only imagine how bad things must be behind the surface in Europe's financial sector for them to admit they desperately need equity capital.
On today's US docket list is latest US Consumer Confidence report (which as usual focuses on Wall Street executives), Case-Shiller housing data and the
release of the weekly API report.
Recapping the market with RanSquawk
- Financials underperformed in Europe following less than impressive earnings from Barclays and Deutsche Bank.
- The PBOC injected CNY 17bln via 7-day reverse repos for the first time since February.
- RBA Governor Stevens said Q2 inflation data retains RBA's scope to ease and that the AUD drop makes sense and that it is no major surprise if it falls further.
Market Re-Cap
Stocks in Europe have come off their best levels of the session, but remain broadly higher, with under performance observed by oil & gas, as well as financials, following less than impressive earnings report releases by Barclays and Deutsche Bank. On the other hand, solid trading updates by EDF and Alcatel Lucent ensured that in spite of the looming risk events (ECB, BoE and NFP), major equity indices in Europe remained in positive territory.
Looking elsewhere, the risk on sentiment failed to deter flows into fixed income assets, with Bunds trading flat for much of the session, as month-end related flows accelerated, as well as supportive NCR for the week where c. EUR 13bln of gross supply is outweighed by coupons and redemptions. Of note, BarCap Euro month-end extension stands at +0.14yrs (above avg). Modest tightening in peripheral bond yield spreads was in part supported by reports that the SNB has boosted holdings of AA bonds to 23% from 18% in Q1.
Overnight in Asia, the PBOC injected CNY 17bln via 7-day reverse repos for the first time since February. While the governor of the RBA, said Q2 inflation data retains RBA's scope to ease and that the AUD drop makes sense and that it is no major surprise if it falls further, which resulted in broad based selling of the currency.
Going forward, market participants will get to digest the release of the latest US Consumer Confidence report, Case-Shiller housing data and the release of the weekly API report.
Asian Headlines
Japan plans to forecast growth of about 1% in real gross domestic product for fiscal 2014, a deceleration from this fiscal year on the upcoming sales tax hike and fading effects of economic stimulus. In other news for Japan, there were reports that the Japan pension fund may invest in foreign infrastructure.
People's Bank of China injected CNY 17bln via 7-day reverse repos today, which was the first time the PBoC injected via reverse repos since February.
This morning, China reiterated proactive fiscal policy and prudent monetary policy, adding that China H1 economic indicators within target.
EU & UK Headlines
Italian bond auction results, sells EUR 6.75bln vs. Exp. EUR 6.75bln.
- Sells EUR 3bln in 3.5% 2018, b/c 1.36 (1.30) and avg. yield 3.22% (Prev. 3.47%)
- Sells EUR 3.75bln in 4.5% 2024, b/c 1.32 (1.46) and avg. yield 4.46% (Prev. 4.55%)
- Looming redemptions/coupon related flows proved supportive of demand. (EUR 33.6bln in coupons/ redemptions due on Thursday)
German CPI - Saxony (Jul) Y/Y 2.0% (Prev. 2.0%)
German CPI - Hesse (Jul) Y/Y 1.7% (Prev. 1.6%)
German CPI - Brandenberg (Jul) Y/Y 1.6% (Prev. 1.7%)
German CPI - Bavaria (Jul) Y/Y 1.8% (Prev. 1.8%)
German North Rhine-West CPI (Jul) Y/Y 2.1% (Prev. 2.1%)
Spanish GDP (Q2 P) Q/Q -0.1% vs. Exp. -0.1% (Prev. -0.5%)
Barclays prelim month-end extensions for Pan Euro agg. at +0.14yrs
Barclays prelim month-end extensions for UK at +0.04yrs
US Headlines
President Barack Obama was one of the officials who leaked that he was on the verge of naming Larry Summers to succeed Ben Bernanke as chair of the Federal Reserve, according to a column Monday by progressive columnist Robert Kuttner.
According to Kuttner, in a follow-up email, a reliable source told him the president mentioned Summers on background to a small group of the press.
Barclays prelim month-end extensions for US Treasuries at +0.06yrs
Equities
Stocks in Europe have come off their best levels of the session, but remain broadly higher, with under performance observed by oil & gas, as well as financials, following less than impressive earnings report releases by Barclays and Deutsche Bank. On the other hand, solid trading updates by EDF and Alcatel Lucent ensured that in spite of the looming risk events (ECB, BoE and NFP), major equity indices in Europe remained in positive territory. BP also traded heavy after failing to meet analyst expectations.
FX
EUR/GBP was supported throughout the morning session by the regular month-end related demand from a European central bank (not the ECB).
RBA Governor Stevens said Q2 inflation data retains RBA's scope to ease and that the AUD drop makes sense and that it is no major surprise if it falls further.
RBI left all three key rates on hold as expected this morning but did cut their FY14 GDP growth forecast to 5.5% from 5.7% and said will roll back tightening steps as INR steadies. As a result, USD/INR rate rose to highest since early July and looks set to make a test on June highs of 60.7300.
USD/JPY recovered overnight and in turn supported the Nikkei 225 index after the index dropped over 7% in the previous sessions, however failed to break the 100DMA level to the upside, currently seen at 98.46.
Commodities
RBA Governor Stevens said the Chinese economy has been delivering what policy makers wanted and that market expectations for Chinese growth were unrealistically high. Stevens also commented that long rise in mining investment is now over and that the coming fall could be quite big.
China is studying plan to cut overcapacity and is to also adjust shipbuilding overcapacity, according to an MIIT official.
The SNB suffered a loss of USD 18.5bln in the Q2 on the back of lower gold prices vs. Prev. profit of CHF 8.25bln. The SNB said that its gold holding of 1,040 tonnes were unchanged in the Q2.
Workers at Libya's largest refinery at Ras Lanuf have gone on strike, following worker protests at port, according to sources. Yesterday it was reported that operations at Libya's Es Sider and Ras Lanuf crude oil export terminals had been halted due to strike action.
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The overnight news bulletin from Bloomberg:
Treasuries little changed inside last week’s 2.463%-2.63% range as Fed meeting begins, with statement due at 2pm in Washington tomorrow; for roundup of views on prospects for tapering click here.
Australia’s dollar slid against all major counterparts last night after RBA Governor Stevens said 2Q inflation data suggets there’s still room to cut rates and that he wouldn’t be surprised if AUD fell further
Japan’s industrial production fell in June by the most since March 2011, when the nation was hit by a record earthquake, as automakers cut output for a second month after a surge in April
China’s central bank conducted reverse repos for the first time in five months, helping alleviate a cash squeeze that drove the benchmark interbank lending rate to a four-week high
India’s central bank left interest rates unchanged and said increases in other borrowing costs earlier this month to stem the rupee’s slide will be reversed in a measured way as the currency stabilizes
The Swiss National Bank suffered a loss of CHF18.5b ($20b) in the second quarter as the price of gold tumbled, eroding the nominal value of its holding
Berlusconi’s appeals of a tax-fraud conviction run out this week when a five-judge panel of Italy’s top court determines whether his sentence sticks; decision may come as early as today
Barclays Plc said it will raise GBP5.8b ($8.9b) in a rights offering to bolster capital as it booked its biggest charge to date for customer compensation
Sovereign yields little changed. Asian stocks mostly higher, with Nikkei +1.5% as JPY holds above 98 level. European equities rise. U.S. stock index futures fall. WTI crude, gold, copper fall
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In conclusion, the full overnight recap from DB's Jim Reid
Markets seem to be in a holding pattern ahead of this week’s key events.
Perhaps the only major market not to do so has been the Nikkei which suffered its biggest loss in seven weeks yesterday (-3.3%). Though the index is retracing some of its losses today (+1.4%), this follows a 3% drop last Friday and a 1.1% fall on Thursday, which brings the Nikkei to 12% below its cyclical peak in May. As Deutsche Bank notes, the explanations for the recent weakness have been varied. Firstly, some have been blaming the selloff on the Japanese earnings season. Of the 27 companies which have reported thus far, only half have been able to beat consensus revenue estimates including some notable misses from industrial bellwethers Canon Inc, Kohmatsu and NTT Domoco. The beat:miss ratio stands firmer on the EPS side at 75%:25%. Others attribute the weakness to the Abe government’s recent indecision relating to the implementation of a sales tax hike, which was unexpected following their convincing upper house election victory two Sundays ago. Others point to the recent story that the government plans to slash its GDP growth forecast to 1% in fiscal year 2014 (Nikkei.com). There are also arguments that positioning had been overweight Japanese equities leading into the upper house elections (held on Sunday July 21st) and recent underperformance of Japanese equities has been an unwinding of that. USDJPY’s fall of almost 3% in the last week or so hasn’t helped sentiment either. In terms of other Japanese assets, the Japan IG index has traded about 8bp wider over the last week while 10yr JGB yields have been fairly static at 0.80%. Staying with Japan, today’s data has been disappointing with preliminary industrial production for June printing at -3.3%mom which was lower than the -1.5% expected. This is the lowest monthly result since March 2011 when the Tohoku earthquake hit. Household spending for June was also down (-0.4% vs +1.4% expected).
In China, there have been some renewed rumblings over the recent rise in money market rates in China. The VWAP of the 7-day bond repurchase agreement rate rose by a sharp 70bps yesterday to reach 5.11% after having risen 7 consecutive days prior to that. We understand this was partly due to month end effects as banks shore up their liquidity. Indeed the rate has fallen overnight for the first time in over a week to 4.97%, probably helped by liquidity injections from the PBOC via a RMB17bn 7-day reverse repo.
According to Bloomberg, this is the first time that the PBoC has conducted reverse repos since Chinese New Year in February. Elsewhere in Asia, there’s been some focus on the Australian dollar which has fallen 1.3% against the USD after some dovish comments from the RBA governor and disappointing building approvals data (-6.9%mom vs +2% expected). In terms of Asian equities, we’re seeing better sentiment with most equity indices up about half to one percent.
Outside of Asia, price action has been fairly muted over the last 24 hours amid thin volumes and a scant data calendar to start the week. We noted the 6bp move up in 10yr UST yields during the day yesterday (-1bp at 2.58% overnight) which was accompanied by weakness in EM sovereign credit. Mexican 10yr rates were 11bp higher yesterday and Brazilian 5yr CDS closed about 5bp wider. The MSCI Emerging market equity index (-0.8%) also had its weakest day in three weeks. The S&P500 (-0.37%) failed to sustain its run up to 1700, weighed by financials (-0.7%), oil and gas (-0.84%) and heavy construction (-2.2%).
The weekend story about a potential capital raising at Barclays got lots of air time yesterday which isn’t a surprise given the focus on bank leverage ratios of late. Barclays stock was down 3.5% yesterday and weighed on the overall UK banking sector which fell 0.9% versus a 0.1% gain in the FTSE. Barclays and UBS announce quarterly earnings today in what will be a fairly busy week for European bank earnings. Given that UBS has already given preliminary earnings on the 22nd of July, it will be Barclays which takes much of the limelight today with media reports suggesting a capital raising announcement to come with its earnings report (Reuters). For the record, analysts are expecting EPS of GBP0.36 and revenues of GBP29.3bn.
Turning to the day ahead, as we go to print the Reserve bank of India is scheduled to announce their latest rate decision. Markets expect no change from the RBI following a hike in two other interest rates early this month in an effort to stem currency volatility. In Europe, economic sentiment surveys for the Euroarea, German CPI and Spanish GDP are the major highlights. In the US the focus will be on the consumer confidence survey for July and Case-Shiller home prices for May. Finally the final hearing on Berlusconi’s tax fraud appeal is scheduled to take place today.