Another day, another carry currency-driven futures melt-up to daily record highs (the all important EURJPY soared overnight on the return of the now standard overnight Japanese jawboning of the JPY which sent the EURJPY just shy of a new 4 year high of 138 overnight), and another attempt by the ECB to have its record high market cake, and eat a lower Euro too (recall DB's said the "pain threshold" for the EUR/USD exchange rate - the level at which further appreciation impairs competitiveness and economic recovery - is $1.79 for Germany, $1.24 for France, and $1.17 for Italy) this time with ECB's Hansson repeating the generic talking point that the ECB is technically ready for negative deposit rates. However, with the halflife on such "threats" now measured in the minutes, and soon seconds, the European central bank will have to come up with something more original and creative soon, especially since the EURJPY can't really rise much more without really crushing European trade further.
On today's US event docket we will see US pending home sales, the Dallas Fed, with the Treasury also conducting the first of 3 bond auctions this week starting with a $32 billion 2yr note sale later. Most importantly, there will be a $2.75-$3.50 billion POMO to kick off the holiday week and assure a new all time stock high.
Market Re-Cap from RanSquawk:
Stocks traded broadly higher in Europe this morning, supported by unwind in the so-called war-premium, as well as comments by ECB’s Hansson who said that the ECB is ready to cut interest rates further. Despite the apparent risk on sentiment, Bunds also benefited from the comments by an Estonian central banker, who also stated that the ECB is technically ready for negative deposit rate, which resulted in the Euribor curve paring some of the bear steepening observed earlier in the session. The move higher in Europe was led by airlines and travel & tourism related stocks as market participants reacted to reports that Iran has agreed to limit its nuclear programme in exchange for an easing of sanctions which in turn depressed WTI and Brent Crude prices. Also, European auto makers have been among the biggest beneficiaries, with Peugeot up around 4%. At the same time, Italian banks under performed, weighed on by reports that Monte Paschi’s biggest shareholder favours finding buyers for its stake before bank taps investors for EUR 3bln, while analysts at SocGen stated that Italian banks need calculated a EUR 44bln extra-provision needed to normalise bad loans inventory level. Going forward, market participants will get to digest the release of the latest US Pending Home Sales reports and also the US Treasury will sell USD 32bln in 2y notes.
Key events on US data docket:
- US: Pending home sales, cons 2.0% (10:00)
- US: Dallas Fed mfg. activity, cons n/a (10:30)
- US: sells $32bn 2y notes (13:00)
Overnight news bulletin from Bloomberg and RanSquawk:
- Iran has agreed to limit its nuclear programme in exchange for an easing of tough international sanctions, in a historic deal that follows a decade of on-off negotiations aimed at preventing Tehran from acquiring atomic weapons.
- ECB's Hansson says ECB is technically ready for negative deposit rate, ready to cut interest rates further and ECB will discuss publishing minutes soon.
- Across the European session, equities are mainly seen higher following solution to talks in Geneva, the consequent dip in oil prices has lead the likes of Lufthansa and IAG to trade with gains this morning.
- Treasury 2/10 and 5/10 curves holding near steepest levels since mid-2011 before holiday- shortened week’s auctions begin with $32b 2Y notes.
- Notes to be sold today yield 0.300% in WI trading; drew 0.323% in Oct., 0.43% in June
- European Central Bank Governing Council member Ardo Hansson said the ECB stands ready to cut borrowing costs further and is technically prepared to make its deposit rate negative
- Obama offered reassurances to Israeli leaders and some Democratic lawmakers critical of the nuclear deal as he sought to tamp down maneuvers in Congress that risk undercutting the accord
- Deal comes as Obama’s standing has been damaged by the troubled Obamacare rollout; any political boost for Obama may still be limited because the accord is temporary and Iran isn’t trusted by the American public
- China traded barbs with the U.S. and Japan over its newly announced air defense zone in the East China Sea as escalating tensions between Asia’s largest economies risked damaging a resurgence in trade
- Sovereign yields mostly lower, EU peripheral spreads widen. Asian stocks mixed, with Nikkei 1.5%, China indexes lower. European stocks, U.S. equity-index futures gain. WTI crude, copper and gold lower
Asian Headlines
JPY curve bear-steepened overnight, driven by the weakness in the long-end of the curve ahead of tomorrow's 40y JGB auction, as well as the better bid USD/JPY. JPY weakness was prompted by comments by BoJ's governor Kuroda who said that the implication of negative interest rates on the economy and financial markets was unclear and that negative short-term interest rates could be possible. In other Japan specific commentary, analysts at S&P said that Japan's tax hike and stimulus is positive but that problems remain.
The reform package recently sanctioned by the Communist Party of China will stimulate the economy and help the country sustain annual growth of around 8%, according to China Center for International Economic Exchanges deputy director Zheng Xinli.
EU & UK Headlines
ECB's Hansson says ECB is technically ready for negative deposit rate, ready to cut interest rates further and ECB will discuss publishing minutes soon.
- ECB's Asmussen (neutral, executive board) said a negative deposit rate is a theoretical and possible instrument.
- ECB's Coeure (soft dove, executive board) said ECB are to discuss publishing account of monthly meeting, and interest rates to remain at current or lower levels for extended period of time.
Germany's SPD and CDU parties will each hold 6 ministerial posts in new government, while the CSU party will have three according to sources.
UK BBA Loans for House Purchase (Oct) M/M 42808 vs Exp. 45000 (Prev. 42990) - Gross Mortgage Lending at GBP 9.9bln, highest since December 2009.
Barclays month-end extensions: Euro Aggr (+0.04y)
Barclays month-end extensions: Sterling Aggr (+0.06y)
US Headlines
US lawmakers are readying budget fallback options Amid taxes Impasse. This follows US budget negotiators only having less than three weeks until their deadline and are yet to break an impasse over revenue, prompting lawmakers to draft plans for USD 19 billion in defense cuts set to start in January.
Leading US banks have warned that they could start charging companies and consumers for deposits if the US Federal Reserve cuts the interest it pays on bank reserves.
Barclays month-end extensions: Treasuries (+0.10y) - Of note, although the avg. is around 0.06y, larger than avg. increase had been expected given the 3y, 10y and 30y refunding auctions last week.
Equities
Across the European session, equities were seen higher following the apparent solution to the Iranian talks in Geneva, the consequent dip in oil prices has lead the likes of Lufthansa and IAG to trade with gains this morning. However, Italian banks have been leading the FTSE MIB lower amid reports that Monte Paschi’s biggest shareholder favours finding buyers for its stake before bank taps investors for EUR 3bln, while analysts at SocGen stated that Italian banks need calculated a EUR 44bln extra-provision needed to normalise bad loans inventory level.
FX
Despite higher USD/JPY spot rate this morning, 1mth 25D RR is 0.25 JPY puts vs 0.4 early last week, with analysts at IFR pointing out that RKO (reverse knock-out) barriers tied to money vanillas were tripped on spot ascent to leave market shorter downside. More vanilla barrier levels seen at 102.00 level. Comments by ECB's Hansson which prompted broad based EUR weakness saw the pair move below the key 21DMA line. However losses were capped by EUR/JPY cross, which remained supported by broad based JPY weakness. Of note, EUR/JPY tested touted 138.00 barrier overnight, with more at 139.00 and size 140.00.
According to BofAML USD/JPY may have further upside potential with broad trends continuing to support USD/JPY.
Commodities
Heading into the North American Open, WTI Crude and Brent futures trade in negative territory following reports over the weekend that Iran agreed with the P5+1 to curb some of its nuclear activities in return for about USD 7bln in sanctions relief.
Goldman Sachs says they see a limited impact on oil supply from Iran agreement with 'the volume of Iranian crude oil available to the international market will largely remain unchanged over at least the next six months'.
Iran has agreed to limit its nuclear programme in exchange for an easing of tough international sanctions, in a historic deal that follows a decade of on-off negotiations aimed at preventing Tehran from acquiring atomic weapons. (FT-More) Iran agreed to curtail its nuclear activities and in return won as easing of certain sanctions on oil, auto parts, gold and precious metals. There were also comments from US President Obama that the accord followed intensive diplomacy and cuts off Iran's most likely path to a bomb. Obama also reaffirmed US commitment to Israel and told Israel PM Netanyahu that the US will consult Israel on the Iran deal.
Sinopec have said that operations at its Qindgao production complex will be disrupted following Friday's blast which killed at least 55 people.
DB's Jim Reid recaps the remainder of overnight data
Following four days of discussions in Geneva, Iran struck a deal in the early hours of Sunday morning to curb its nuclear activities in exchange for about US$7bn in sanctions relief on oil, auto parts, gold and precious metals. According to the statement released by the White House, Iran has agreed to, amongst other things, halting uranium enrichment above 5%, “neutralising” its stockpile of near-20% uranium, and stopping progress on its enrichment capacity by for instance not installing additional centrifuges of any types. Iran has also committed to further transparency and monitoring of its nuclear programme. According to the FT, the Iranian currency Rial rallied against the USD within hours of the deal after having depreciated by about 50% over the last two years.
The sanction relief on oil raises the prospects of supply and is clearly adding negative pressure on crude prices this morning. Brent crude is down 2.2% from Friday’s close to US$108.6/bbl, and looking set for its biggest decline in three weeks.
Away from the oil market, Asian equities are faring pretty well across the board overnight. Our equity screens this morning are mostly in the green with gains paced by the Nikkei (+1.1%) and Nifty (+1.3%). As it was a relatively quiet weekend as far as news is concerned (outside of the Iran story), the market could be just following the positive US lead from Friday as the S&P 500 (+0.5%) closed above the 1800 mark for the first time. In reality, a sustained downward shift in crude prices could also be also a welcome boost for Asia generally given its status as a net energy importer. Credit markets continue to grind tighter with the benchmark IG indices in Australia and Asia both about 3bp tighter as we type. On balance, the market technical for cash credit is also becoming more favourable as the supply pipeline tapers off into the holiday season. Gold prices are softer this morning while the JPY continues to weaken to its lowest level since May this year.
Looking ahead at the week ahead, data watchers will be kept fairly occupied before Thanksgiving. Starting with today, we will see US pending home sales with the Treasury also conducting the first of 3 bond auctions this week starting with a $32 billion 2yr note sale later. We will get more housing data tomorrow with the release of housing starts, home prices as well as US consumer confidence. Durable goods, Chicago PMI, initial jobless claims and the final UofM Consumer Sentiment print for November are Wednesday’s highlights although we will also get the UK GDP report for Q3. US Equity and fixed income markets are closed on Thursday but US aside we will get the BoE financial stability report, German inflation, Spanish GDP and Chinese industrial profit stats. Expect market activity to remain subdued into Friday as it will be a half-day for US stocks and bond markets. As ever Black Friday sales will be carefully monitored for consumer spending trends. So a reasonably busy, holiday-shortened week for markets ahead of what will be another crucial payrolls number the following week.