It is time for the centrally-planned markets to "try" for the round number trifecta of 16000, 1800 and 4000 again, although it may be a tad more difficult on a day in which there is no double POMO and just $2.75-$3.50 billion will be injected by the NY Fed into the S&P - perhaps it is Bitcoin that will hit the nice round number of $1000 first? Overnight, the Chinese Plenum news rerun finally was priced in and the SHComp closed red, as did the Nikkei 225 as the Asian euphoria based on communist promises about what may happen by 2020 fades. What's worse, the Chinese 7-day repo rate is up 140bp this morning to 6.63% amid talk of tightening domestic liquidity conditions, and back to levels seen during the June liquidity squeeze. All this is happening as China continues leaking more details and hope of what reform the mercantilist country can achieve, and how much internal consumption the export-driven country can attain: overnight there were also additional reports of interest rate liberalization and that the PBOC are to set up a floating CNY rate. Good luck with that.
Heading west to Europe, the German ZEW Surve printed at 54.6 up from 52.8 and above expectations of 54.0 - the highest since October 2009, however the current situation survey dropped from 29.7 to 28.7, well below the expected 31.0. According to the ZEW expectations increased slightly following the ECB rate cut. So Germany should not have a problem with greenlighting QE then - just think of how high the ZEW would surge. Also in Europem Italian Industrial Orders missed expectations of a 2.0% increase, and instead declined from 2.2% to 1.6% in September. In Spain, Confidencial reported that the ECB stress tests may penalize Spanish bank bond holdings, because only in Europe will the central bank which bailed out Spain's bank penalized Spain's banks.
In conclusion, and in the most bullish news of the day - for stocks of course - the OECD lowered 2014 world GDP forecast from 4.0% to 3.6%. At the same time is urged the ECB to consider QE and scrap the debt ceiling. What can one say: the OECD - the best friend of the 0.1%.
There is nothing on the US docket today except the following two things:
- US: Employment cost index for Q3, cons 0.5% (8:30)
- US: Fed speaker Evans (14:15)
Overnight bulletin from Bloomberg and RanSquawk:
- China's Zhou says PBOC to remove itself from day-to-day interventions in the domestic FX market and establish a managed floating CNY FX rate, will cut the ratio of T-Bonds held to maturity. Governor Zhou Xiaochuan said, without giving a timeframe
- OECD lowers 2014 world GDP forecast to 3.6% from 4.0% in May outlook. Calls on ECB to consider quantitative easing and says that the U S should scrap the debt ceiling for a credible long-term budget plan.
- Combination of profit taking related flow, as well as initial reaction to comments by Fed’s Dudley and Plosser saw USTs edge lower overnight in Asia and in turn resulted in lower Europe open.
- Treasuries decline, 10Y yield holding near 50-DMA at 2.671%, 100-DMA at 2.665%; light eco calendar with Bernanke due to speak at National Economists Club in Washington at 7pm.
- JPMorgan has resolved the last obstacles to a record $13b settlement of civil state and U.S. probes over the sale of mortgage bonds, clearing the way for a deal today after months of negotiations, two people briefed on the matter said
- German investor confidence rose to 54.6 in November, highest level in more than four years, from 53.8 in prior month and median estimate of 54 in Bloomberg survey
- ECB’s Asmussen said policy makers haven’t exhausted their options to counter low inflation, must be very careful on negative deposit rate, according to an interview broadcast on Austria’s ORF radio
- Greek banks’ bad loan ratio at 32%, with rate of increase in non-performing loans slowing, Kathimerini reported
- OECD cut its forecast for global growth to 2.7% this year and 3.6% next year from the 3.1% and 4% predicted in May as emerging markets including India and Brazil cool
- Potential shortfalls in Obamacare enrollment would put a 30% dent in projections for U.S. prescription-drug sales in 2017, a report from IMS Health Inc. shows
- Obama’s job approval rating fell to 42% in a ABC News/Post poll, down 13 points this year and six in the past month to match the lowest of his presidency
- Sovereign yields mostly higher, EU peripheral spreads narrow. Asian, European stocks, U.S. equity-index futures lower. WTI crude, copper and gold lower
Market recap:
China will gradually expand the CNY trading band to help make the currency more flexible. A combination of profit taking related flow, as well as initial reaction to comments by Fed’s Dudley and Plosser saw USTs edge lower overnight in Asia and in turn translate into somewhat cautious equity cash open in Europe. Also, reports that China will gradually expand the CNY trading band to help make the currency more flexible and market-driven resulted in broad-based, albeit short-lived USD weakness which pushed EUR/USD and GBP/USD to session highs. However the reaction was short-live and the initial bout of selling pressure quickly abated after it became apparent that these comments were part of the study guide released by a Communist Party after the third plenum and is part of long-term reforms as recently proposed by the Chinese government. Still, the fact that the head of the Bank also noted China will cut the ratio of T-Bonds held to maturity is USD negative in the near future. In other news, German ZEW survey expectations for the month of October came in at its highest since October 2009, while the OECD lowered 2014 world GDP forecast to 3.6% from 4.0% in May outlook. The OECD also called on the ECB to consider quantitative easing and stated that the US should scrap the debt ceiling for a credible long-term budget plan. Going forward, market participants will get to digest the release of the weekly API report and await comments from Fed’s Evans and Bernanke.
Asian Headlines
China's Zhou says PBOC to remove itself from day-to-day interventions in the domestic FX market and establish a managed floating CNY FX rate. However, no timeline has yet been given.
The Chinese Ministry of Commerce says China exports continue to face difficulties and fast CNY rise is squeezing exporter profits.
Japanese Economy Minister Amari said expects stimulus to be about JPY 5trln with tax measures of about JPY 1-2trln pushing the total up to about JPY 6trl, aimed to counter impact of tax hike.
EU & UK Headlines
German ZEW Survey Expectations (Nov) M/M 54.6 vs Exp. 54.0 (Prev. 52.8) - Highest since October 2009
German ZEW Survey Current Situation (Nov) M/M 28.7 vs Exp. 31.0 (Prev. 29.7)
OECD lowers 2014 world GDP forecast to 3.6% from 4.0% in May outlook
Calls on ECB to consider quantitative easing.
US should scrap the debt ceiling for a credible long-term budget plan.
Eurozone banks are set to be allowed to avoid complex new definitions for bad loans in their first data submissions in next year's ECB check, winning a temporary reprieve from their heavy data-gathering burden.
UK DMO sells GBP 3.75bln 2.25% 2023 Gilts, b/c 1.80 (Prev. 1.84) tail 0.2bps (Prev. tail 0.2bps)
US Headlines
The US Treasury has face a backlash from the likes of BlackRock, PIMCO and Fidelity after a report by the Office of Financial Research showed that asset managers could pose risks to the broader financial system.
Equities
Stocks traded lower in early European trade after coming off the highs seen yesterday, which resulted from the positive sentiment observed in the Asian session. Afren are leading the way this morning following the Co.'s drilling results being 'significantly' above expectations. EasyJet are also trading in the green after the Co.’s proposed dividend pence per share increased 55.8% from GBP 0.215 to GBP 0.335. In terms of laggards Paddy Power are leading the way downwards after the Co. lowered operating profit growth in 2013 before FX to be about EUR 11mln lower than mid-point of previous guidance. From a sector specific perspective, Industrials are being lead lower following Intertek's pre-market earnings.
Home Depot (HD) Q3 EPS USD 0.95 vs. Exp. USD 0.90, year forecast raised
FX
The FT writes that traders are betting China's CNY is about to strengthen to its highest level against the US dollar since at least 1998. One month non-deliverable forwards, which are contracts betting on the renminbi-US dollar exchange rate in a month's time, have jumped to 6.1265 per dollar, their strongest since December 1998. This saw a relatively short-lived market reaction by market participants as despite the news being released, markets were not presented with much in the way of a timeline for these events and therefore isn't gaining the momentum that the headline could have brought.
Overnight, AUD/USD pared back all the initial losses seen in the wake of the RBA policy November meeting minutes, which
were somewhat surprisingly 'upbeat' showing that the RBA saw improvement in forward looking indicators in the last month and sees "mounting evidence" that past rate cuts supporting activity and asset values. This comes despite the RBA saying that they feel AUD is still uncomfortably high with a fall needed to rebalance the economy and not closing possibility of a rate cut to support growth.
Commodities
Heading into the North American open, WTI crude and brent futures trade in minor negative territory after retracing most of the losses seen overnight, with a weaker USD providing some upside for commodities. Brent did see some upside later in the session after an AFP tweet claimed that Iran had accused Israel of being behind the Beirut bombing earlier in the day.
Earlier today it was reported that two explosions were heard in South Beirut near Iranian Embassy, it was later revealed that an Iranian official was killed in the blast. Afterwards an AFP tweet: "Iran accuses Israel of being behind Beirut bombing".
Iran are to pump their first oil at fields shared with Iraq by the end of the Iranian year according to Press TV.
Obama is to meet with the Senate today in an attempt to try to dissuade the House from imposing more Iran sanctions *Please see today's 'Energy Commentary' report for more energy news.
SocGen's macro event recap:
It could be costly to fail to provide accommodation [to the market],” Fed chair nominee Yellen told US Senators last Thursday. Maybe that, and a 12-month forward P/E of 15.5 vs a 10y average of 16.3, is why investors continue to articulate a bullish view for risk assets. And are lower yields a sign that markets are pricing in a fall in annual CPI to 1% this week and therefore UST 10y yields are dropping back below 2.70%? The reality is that because of falling US yields EUR/USD is trading back to where it was before the ECB cut rates two weeks ago (1.3532). Intra-day flows continue to support the EUR at these levels and shows that the ECB's powers are limited as it battles disinflationary pressures. Data yesterday reported a widening in the eurozone trade surplus to EUR14.3bn in September, a 45% increase from a year ago despite an anaemic economic recovery. The current account surplus has been running in double digits every month since May 2012. With numbers like that, the pace of EU depreciation will be glacial until the surplus is whittled back or US rates push higher. Meanwhile, foreign investors chose to offload $26.2bn of US T-bills in September as the government went into shutdown. A budget deal is of the essence before January.
A speech by ECB chief economist Praet in Frankfurt will garner close attention one week after the interview in the WSJ where he put forward the idea of outright asset purchases as a policy solution to help arrest the disinflationary pressure from building. We look for a rise in the ZEW survey expectations in November to 56.1 vs 52.8 last and a rise in current conditions to 32.4 vs 29.7 last, the highest since June 2012.
DB's Jim Reid concludes the overnight event summary:
The positive sentiment from Chinese reforms has abated somewhat today after a very strong day for Chinese H-shares yesterday. The closely watched Hang Seng China Enterprises index is still up 1.0% today (following a 5.7% gain yesterday) and it’s safe to say that there is still a reasonable bid from offshore for Chinese exposure. But as we noted yesterday, the bullish sentiment from reforms isn’t flowing through to all Chinese risk assets uniformly at the moment. Indeed, onshore equity indices are tracking slightly lower today (Shanghai Composite -0.1%) and, by sector, the softness in onshore equities is being driven by cyclicals including smelters and autos. Copper futures are down another half a percentage point and mining stocks in Asia are trading with a mixed tone. The recently announced reforms place a heavy emphasis on curbing overbuilding, protection of the environment and achieving sustainable growth, so it’s not unexpected that cyclicals to be lagging to some extent.
There is also increasing focus on the onshore Chinese fixed income markets at the moment. One of the major goals of the reforms was to liberalise Chinese money rates - which includes the Chinese treasury yield curve. The 10yr government bond yield has been rising over the last few months and has increased by around 50bp in November alone. Some of this move can be put down to positioning ahead of the third plenum announcements but we’ve also seen yields add 15bp over the past two days alone (currently 4.657% from lows of 3.45% in May). Staying in the money markets, the 7day repo rate is up 140bp this morning to 6.63% amid talk of tightening domestic liquidity conditions. This move brings its back up to levels seen during the liquidity squeeze in June . The increase in rates is also having a negative impact on onshore corporate bond markets. Offshore though, US dollar Chinese corporate bonds remain fairly well bid and spreads have tightened by a several basis points over the past couple of days. Although we imagine that the onshore rate selloff is negative for bank investment portfolios in the short term, our Chinese banking analysts expect higher bond yields to eventually raise returns for bond investments and increase loan pricing for large corporates, which will help mitigate the impact from deposit rate regulation.
Again, our view on the reforms is that the range of announced measures is impressive and that they are step in the right direction, but the truth will be in the execution. There are conservative interest groups within the government and State-owned sector who would be resistant to reforms, but as DB’s James Malcolm argues the big question is whether China can implement these reforms quickly enough for impatient markets. An argument can also be made that if reforms are implemented too quickly the frictional costs for the economy could come to the fore. So it’s definitely a delicate balancing act for the government and one which will be crucial to markets over the weeks, months and even years to come.
Outside of China, US markets spent most of the day above 16000 and 1800 on the Dow and S&P 500 before slipping in the last hour of trading with the S&P 500 closing at 1792 - down 0.37% on the day. Explanations for the late selloff varied. Carl Icahn was quoted at a Reuters investment conference that he is “very cautious” on equities and that the equity market could easily have a “big drop”. Icahn also commented that earnings are a mirage and are being boosted by low interest rates. His comments were published on newswires well after the downward slide had begun though. Others blamed hawkish comments from the Philly Fed’s Plosser earlier in the day who argued for a fixed cap on QE and that the labour market had sufficient momentum to justify a start to tapering. Plosser also argued that he wasn’t supportive of linking QE tapering with changes in the Fed’s unemployment threshold for rate hikes, describing the policy shifts as potentially a source of confusion which could undermine the effectiveness of forward guidance. Plosser is a FOMC voter next year and is a known hawk. Those comments were at odds with the NY Fed’s Dudley (a voter and a dove) who described current labour market momentum as insufficient. He also commented that there was enough slack in labour markets to continue with very accommodative monetary policy without having an inflation problem.
The late weakness in stocks helped US treasuries rally into the close (-4bp on the day) but the catalyst for the rally in rates started with a weaker than expected NAHB homebuilder sentiment report. The sentiment index came in at 54.0 for November, which was unchanged from October, but was weaker than the median estimate of 55.0. The index remains at a five month low but it’s still much higher than at any point in H1 of the year. The detail of the report showed some softening in the outlook and in buyer traffic, perhaps as the impact of higher mortgage rates starts to flow through. The US dollar was a touch weaker against major currencies– and the combination of firmer UST yields and weaker dollar spurred a strong day for EM. Indeed the MSCI EM index gained 2% for its best gain in a month while EM bond yields were firmer on the day.
Looking at the day ahead, Italian industrial orders and sales and the German ZEW survey are the main data highlights in Europe. In the US, the employment cost index will be released but there will be some focus on the Fed speak. Indeed, Bernanke will deliver the Herbert Stein Memorial Lecture at the National Economists Club in Washington DC, well after the US markets close. He's not expected to discuss Fed policy but there may some interesting snippets from the Chairman.