It was the deep of illiquid night when the momentum ignition trading algos struck. Out of the blue, a liftathon in all JPY crosses without any accompanying news sent the all important ES leading EURJPY surging by 50 pips, which in turn sent both the Nikkei up over 1% in minutes, and led to an E-Mini futures melt up of just about 8 points just when everyone was going to sleep.
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All of this happened completely independent of the actual data, which was chiefly European retail sales which missed (-0.6%, Exp. 0.4%, prior revised lower to 0.5%), Eurozone Service PMI which dropped (from 52.2 to 51.6) but beat expectations of 50.9 (notably the Spanish Service PMI of 49.6, up from 49.0 saw its employment index drop from 46.5 to 45.3, the lowest print since June), and finally, German Factory Orders which surged from last month's -0.3% to +3.3% in September. And while all this impacted the EUR modestly stronger, it had little if any residual effect on the ES. The bigger question is whether these slightly stronger than expected data point will offset the ECB's expected dovishness when Mario takes to the mic tomorrow).
A snapshot of Europe's final composite PMIs for October is shown below:
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Looking at today’s calendar, there is a bit of a mid-week lull before we head into the business end of the week (ECB meeting tomorrow and payrolls/Bernanke on Friday). With largely irrelevant European data out of the way the main remaining US-based data releases are mortgage applications and the leading index. The Cleveland Fed’s Pianalto speaks on housing and the economy towards the end of the US trading day.
Market Recap from RanSquawk:
Despite the looming risk event (ECB policy meeting), stocks traded higher, as market participants used yesterday’s sell-off as an opportunity to re-establish longs. At the same time, Bunds also remained bid, albeit marginally but were again dragged lower by Gilts which underperformed the benchmark German equivalent following the release of yet more solid UK macroeconomic data (Manufacturing/Industrial Production). Looking elsewhere, the release of the latest Eurozone Retail Sales report, as well as Eurozone based services PMIs failed to have a meaningful impact on the price action, which remained range bound for much of the session. Going forward, market participants will get to digest the release of the latest Challenger Job Cuts report, Weekly DoE data and also earnings by Time Warner and QUALCOMM.
Overnight bulletin summary from Bloomberg and Ran:
- Eurozone Retail Sales (Sep) M/M -0.6% vs. Exp. -0.4% (Prev. 0.7%, Rev. to 0.5%) and Eurozone Services PMI (Oct F) M/M 51.6 vs. Exp. 50.9 (Prev 52.2).
- German Factory Orders (Sep) M/M 3.3% vs. Exp. 0.5% (Prev. -0.3%)
- UK Industrial Production (Sep) M/M 0.9% vs. Exp. 0.6% (Prev. -1.1%) and UK Manufacturing Production (Sep) M/M 1.2% vs. Exp. 1.1% (Prev. -1.2%)
- Treasuries steady, 10Y yield holding above 100-DMA, as market waits GDP and nonfarm payrolls on Friday for more clues on possible Fed tapering; ECB rate decision due tomorrow.
- A pair of research papers by high-ranking Fed staffers make the economic case for prolonging stimulus by targeting a lower unemployment rate and a bigger window for inflation
- SF Fed’s John Williams said economic growth in recent months has fallen short of his expectations, partially eroding his confidence gains in the labor market will endure without monetary stimulus
- German factory orders increased more than estimated 3.3% in September, more than forecast
- U.K. industrial production rose 0.9% in September, more than economists forecast, helped by a rebound in manufacturing after a slump the previous month
- New Zealand employment increased 1.2%, or by 27,000 jobs, from the 2Q, the most since early 2007
- Sovereign yields mixed, EU peripheral spreads narrowing. Nikkei +0.8%, Shanghai falls 0.8%. European stocks, U.S. equity-index futures gain. WTI crude, gold, copper higher
Key US events:
US: Fed speaker Pianalto (13:10)
US : MBA mortgage applications, cons n/a (7:00)
US : Leading index, cons 0.6% (19:00)
Asian Headlines
BoJ Minutes for the October meeting said Japan's economy is recovering moderately and is expected to continue moderate recovery. According to the minutes, members said that consumer prices will likely rise gradually, while a few members said a rise in inflation expectations was moderate and that the pace of export recovery and output lacks strength.
EU & UK Headlines
As part of the ECB stress tests, sovereign debt holdings of Eurozone banks will not be counted toward the final assessment, according to unsourced reports.
German Factory Orders (Sep) M/M 3.3% vs. Exp. 0.5% (Prev. -0.3%)
Eurozone Retail Sales (Sep) M/M -0.6% vs. Exp. -0.4% (Prev. 0.7%, Rev. to 0.5%)
Eurozone Services PMI (Oct F) M/M 51.6 vs. Exp. 50.9 (Prev 52.2)
German Services PMI (Oct F) M/M 52.9 vs. Exp. 52.3 (Prev. 53.7)
French Services PMI (Oct F) M/M 50.9 vs. Exp. 50.2 (Prev. 51.0)
Italian Services PMI (Oct) M/M 50.5 vs. Exp. 51.2 (Prev. 52.7)
Germany sells EUR 3.268bln in 1.00% 2018, b/c 2.3 (Prev. 2.0) and avg. yield 0.71% (Prev. 0.81%), retention 18.3% (Prev. 16.3%)
UK Industrial Production (Sep) M/M 0.9% vs. Exp. 0.6% (Prev. -1.1%)
UK Manufacturing Production (Sep) M/M 1.2% vs. Exp. 1.1% (Prev. -1.2%)
Industrial Output 2.2% (Sep) Y/Y - strongest annual rate since Jan 2011. Industrial Output adds 0.002% to UK Q3 GDP, impact therefore minimal.
US Headlines
Fed's Williams (Non-Voter, dove) expects growth to accelerate in early-2014 and said that growth is weaker than expected a few months ago. At the conclusion of the QE program, the Fed should announce an end instead of keeping it open-ended, according to Williams.
Equities
Stocks traded higher this morning, as market participants largely disregarded the looming risk event and used the sell off observed yesterday as an opportunity to re-establish longs. Technology and consumer services sectors led the move higher, although the risk on sentiment ensured that all major sectors traded in positive territory.
FX
GBP/USD outperformed its major counterpart EUR/USD yet again, supported by the release of yet another solid UK based macroeconomic
data. Broad based rebound by EUR following yesterday's aggressive sell-off weighed on the Greenback, with the USD index down 0.27% at
1108GMT. Elsewhere, NZD was supported overnight trade following the release of New Zealand jobs data where the Unemployment Rate
printed at 6.2% as expected but Employment Change beat expectations at 1.2% vs. Exp. 0.5% Q/Q.
Of note, Goldman Sachs said the RBA is just about done, but it still sees a cut, adding that the strength of AUD is pressing the central bank
to cut rates.
Commodities
Iranian foreign minister said believes Iran can reach a framework agreement on nuclear talks this week, but not necessary to do so.
The Eni CEO has said that its Libya terminal is under attack by protestors in an attempt to stop exports, as reported by ANSA.
Furthermore for Libya according to Union, Libya's Hariga port not open for exporting crude as former petroleum facility guards are not allowing tankers to enter the Haringa port.
US API Crude Oil Inventories (Nov 1) W/W 871k vs. Prev. 5900k
Cushing Crude Inventory (Nov 1) W/W 999k vs. Prev. 2200k
Gasoline Inventories (Nov 1) W/W -4300k vs. Prev. 740k
Distillate Inventory (Nov 1) W/W -2700k vs. Prev. 815k
Chinese metal and mining companies could be facing a heightened risk of write-downs, according to Barclays’s analysis of earnings reports from the June-September quarter.
SocGen recaps the key macro headlines:
FX volatility stayed bid overnight even as USD gains have been whittled back, but EM currencies continue to struggle as rates from Brazil to South Korea are backing up. Brazil central bank head Tombini sounded a warning to stay vigilant on inflation yesterday and a surprise 3.5 percentage point jump in US ISM non-manufacturing employment added to the corrective price action as UST yields rose above 2.64%, a key technical level. US leading indicators for October are proving that the government shutdown has had a trivial impact on private sector hiring, and consequently, investors are now readjusting underweight USD positions. How far can this run? The repositioning vs a low initial payroll consensus estimate of 120k may have further to go, but much will depend on how much US payrolls surprise on Friday. A 140k gain would not bring Fed tapering any closer and the back up in yield we are seeing would swiftly run out of steam. This makes it tricky to call the next move.
A lot also rides on the ECB meeting tomorrow - simply put, the market will be disappointed if there is no dovish signal. For EUR/USD, the 1.3455 level remains key, and yesterday's price action shows that bulls will not throw in the towel easily with scattered buying reported by different types of accounts on EUR dips. Currencies displaying a strong correlation with US 10y yields were the biggest losers yesterday. These include the BRL, MXN and ZAR. The 4.7% move in USD/BRL since last week has propelled the pair to close to the pivotal 2.30 level. A break could spell more trouble and a potential return to 2.40 if the push higher in US yields carries on.
EUR/GBP fell to a fresh one-month low of 0.8385 in Asia following on from the sharp retreat yesterday. A surge in the UK services PMI to 62.5 boosted optimism of a further acceleration in Q4 GDP growth to above 1% qoq. The BoE has its homework cut out ahead of the Inflation Report next week. An upward revision to GDP (and inflation?) forecasts is now likely and will keep the debate going over the timing of a first rate hike. On this basis and with a potentially dovish ECB lurking tomorrow, momentum is behind a return of EUR/GBP to the October low of 0.8332.
Final services PMI data from the eurozone are not expected to reveal any shocks this morning. Nor are German new industry orders, but we expect the 2018 bond tap (EUR4bn) to show only moderate demand given the relatively poor value to the curve. Germany has so far achieved 88% of this year's issuance programme compared to 86% at the same stage last year. In the UK, manufacturing output is forecast to have gained 1.1%, reversing the 1.2% contraction of August. In EM we look for the Polish central bank to keep its benchmark rate on hold at 2.50%.
DB's Jim Reid concludes the overnight recap:
The prospect of an earlier taper, offset to some extent by later rate hikes, weighed on treasury markets yesterday. 5yr, 7yr and 10yr UST yields added 1bp, 3bp and 5bp respectively. A better than expected US ISM nonmanufacturing report for October added further momentum to the sell-off. The headline print came in at 55.4, which is 1 point higher than the previous months’ reading and beat Bloomberg consensus expectations by 1.4 points. Our economists highlight that the headline was led by a large 3.5 point jump in employment to 56.2 which is the highest reading since August when nonfarm payrolls grew by +193k. DB are projecting a +130k increase in Friday’s October employment report, but the ISM figures impart some mild upside risk to that forecast.
Indeed it was a weak day for most fixed income markets as markets turned bearish on duration. We saw softness across bunds (+7bp), OATs (+7bp) and gilts (+10bp) which accompanied the selloff in EM fixed income. The underperformance of gilts was attributed to another strong UK economic report - this time the service sector PMI - which came in at 62.5 against expectations of 60.0. EURGBP fell 0.8% yesterday and is down more than 2% over the last five days. Credit spreads were pulled wider across cash and indices; but that backdrop didn’t dampen activity in the primary markets though, with over US$14bn of investment grade deals launch yesterday across 21 tranches on Tuesday (Reuters). The S&P500 managed to claw its way back from early lows of -0.7% but a late drop saw the index close weaker (-0.28%) for just the fifth time in 20 trading days.
Looking at today’s calendar, there is a bit of a mid-week lull before we head into the business end of the week (ECB meeting tomorrow and payrolls/Bernanke on Friday). The final PMI services numbers for Europe are due out shortly after we go to print, which will be followed up by German factory orders for September. A German 5yr bund auction will take place today. In the US, the main data releases are mortgage applications and the leading index. The Cleveland Fed’s Pianalto speaks on housing and the economy towards the end of the US trading day.