Something snapped overnight, moments after the EURJPY breached 140.00 for the first time since October 2008 - starting then, the dramatic weakening that the JPY had been undergoing for days ended as if by magic, and the so critical for the E-Mini EURJPY tumbled nearly 100 pips and was trading just over 139.2 at last check, in turn dragging futures materially lower with it. Considering various TV commentators described yesterday's 0.27% decline as a "sharp selloff" we can only imagine the sirens that must be going off across the land as the now generic and unsurprising overnight carry currency meltup is missing. Still, while it is easy to proclaim that today will follow yesterday's trend, and stocks will "selloff sharply", we remind readers that today is yet another infamous double POMO today when the NY Fed will monetize up to a total of $5 billion once at 11am and once at 2 pm.
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There is little on the US calendar today with just auto sales and the IBD/TIPP economic optimism survey on the event docket. Expect markets to be in a holding pattern as we approach the ADP employment tomorrow, the ECB on Thursday and ending with payrolls on Friday.
Overnight news bulletin summary from Bloomberg and RanSquawk
- A combination of profit taking and touted positioning ahead of major risk events continued to weigh on stocks in Europe this morning.
- Bunds failed to benefit from the evident risk off sentiment yet again and edged lower for much of the session, driven by the looming supply out of France and Spain later on this week.
- Looking ahead for the session, IEA Chief Economist Birol is to present the world energy outlook and there is the release of US API Inventories.
- Treasuries steady, 10Y yields holding near 2.80% support and 5Y just below 100-DMA; focus is on potential for Friday’s jobs data to revive prospect FOMC will decide to taper QE starting in January.
- Simon Potter, the Federal Reserve Bank of New York’s markets group chief, said the Fed’s new reverse repurchase agreement tool probably will be a key part of how the central bank eventually tightens monetary policy
- China’s yuan overtook the euro to become the second-most used currency in global trade finance in 2013, according to the Society for Worldwide Interbank Financial Telecommunication
- An index of U.K. construction activity rose to 62.6 in Nov., more than forecast, from 59.4 in October
- Schaeuble is seen holding his post as German finance minister as German Social Democrats pressing to gain control of the ministry in Merkel’s next government consider the battle to be lost, two party officials with knowledge of the matter said
- Ukraine’s opposition leaders are trying to force a vote of no-confidence against the government even as President Viktor Yanukovych said he still favors closer ties to the West after rejecting an EU trade pact
- The first annual losses in U.S. agency MBS since 1994 are deepening as the dual threats of a new regulator and a Fed pullback leave buyers navigating around what JPMorgan calls a modern-day Scylla and Charybdis
- Obama plans a three-week campaign that will emphasize the importance of using the healthcare.gov web site to enroll Americans in health plans, the White House said in a statement
- The U.S. placed 26th in math, 21st in science and 17th in reading among the 34 countries in the OECD, according to results of the 2012 Programme for International Student Assessment
- Sovereign yields mixed. EU peripheral spreads narrow. Asian stocks mostly lower, European stocks and S&P 500 index futures decline. WTI crude rises, gold little changed, copper falls
Market Recap from RanSquawk
Combination of profit taking and touted positioning ahead of major risk events continued to weigh on stocks in Europe this morning, where French CAC underperformed its peers after analysts at Credit Suisse cut French stocks to underweight rating from benchmark. Basic materials sector led the move lower, where Rio Tinto and BHP traded lower by around 1.5% after Rio Tinto said that it expects further cuts in capital spending over the next two years against the backdrop of expected continued financial market volatility. Furthermore, reports of technical selling in equities also added to the downside. In addition to that, it was reported that China may set 2014 GDP growth target at 7%. However even though credit spreads widened, Bunds failed to benefit from the evident risk off sentiment yet again and edged lower for much of the session, driven by the looming supply out of France and Spain later on this week. Looking elsewhere, the release of better than expected UK PMI Construction, which came in at its highest level since August 2007, ensured that GBP outperformed EUR, with GBP/USD consequently testing 2013 highs. Broad based USD weakness, as well as the fact that market is now left with JPY shorts to cover the erasure of RKO barriers weighed on USD/JPY, while EUR/JPY also failed to consolidate above 140.00 level. Going forward, market participants will get to digest the release of the latest ISM New York survey and also API data after the closing bell on Wall Street.
Asian Headlines
Chinese Non-Manufacturing PMI (Nov) M/M 56.0 (Prev. 56.3)
China may set 2014 GDP growth target at 7%, may aim to control CPI growth at 3.5% in 2014 and may set M2 growth target at about 13%, according to Chinese research organizations.
Japan's economic stimulus package to be JPY 5.4trl to 5.6 trl, according to sources.
EU & UK Headlines
UK PMI Construction (Nov) M/M 62.6 vs Exp. 59.0 (Prev. 59.4) - Highest reading since August 2007
BoE Nov FPC minutes says financial stability risks remain
- Risks seen from indebtedness and low interest rates.
- Members more concerned about housing market.
- To be vigilant on mortgage underwriting standards.
- Will not consider raising leverage ratios for banks until international definitions are finalised.
BNP Paribas now expects ECB to conduct QE in 2014
UK DMO sells GBP 1.25bln 5% 2025 Gilt Auction, b/c 1.99 (Prev. 2.25)
Portuguese/German 10y spread has tightened following a successful bond exchange, with PO/GE 10y at 425bps and the front-end of the curve outperforming as EUR 6bln in 2014-15 is bought and EUR 6bln in 2017-18 sold by the Portuguese treasury.
Despite the evident under performance by French stocks after analysts at Credit Suisse cut French stocks to underweight rating from benchmark, French bonds have outperformed EU peers, supported by domestic and also Asian accounts buying.
Italy President Napolitano and PM Letta agreed on need to call confidence vote and vote may take place next
week according to a statement.
US Headlines
New York Fed's market group chief Potter said repo plan may strengthen short-term rate floor and that the new repo tool should increase Fed control of rates. Potter also stated that the reverse repo plan offers a promising new advance and is not a sign of FOMC policy intentions Potter further commented that a cut to IOER may put money market functioning at risk and that an effective Fed's funds rate higher than IOER seems far off.
Goldman Sachs 5th top trade for 2014; long 7y CDX IG21 junior mezz. 7y CDX IG21 junior mezz is the Markit CDX North America Investment Grade Index which is composed of 125 equally weighted credit default swaps on investment grade entities.
Equities
Equities have been seen lower across the board this morning ahead of this weeks key risk events which include, the Autumn Statement from the UK, ECB and BoE rate decisions on Thursday and the US Nonfarm Payrolls release on Friday. The CAC is the underperformer this morning after analysts at Credit Suisse cut French stocks to underweight rating from benchmark. Basic materials sector led the move lower, where Rio Tinto and BHP traded lower by around 1.5% after Rio Tinto said that it expects further cuts in capital spending over the next two years against the backdrop of expected continued financial market volatility. One of the main equities stories this morning was market talk that the Siemens have denied earlier speculation that they are to issue a profit warning. Furthermore, Commerzbank says its offices were searched on Tuesday in connection with a tax evasion probe. However, says investigation not focused on Commerzbank, but on employees of a third-party company.
FX
EUR/JPY failed to hold onto its best levels of the session, after erasing touted barriers at 140.00, which consequently saw the cross touch on its highest level since October 2008, as short covering of JPY shorts following earlier erasure of RKO barriers weighed on USD/JPY. Furthermore, USD weakness has lead to AUD/USD to pair the losses seen overnight.
Commodities
Heading into the North American open, WTI and Brent Crude futures trade relatively unchanged despite seeing some upside in early trade amid a weakening USD. One of the main focuses for markets this week will be tomorrow's OPEC meeting, with OPEC expected to maintain its 30mln bpd output limit, according two delegates and the Iraqi Oil Minister.
Iraqi Oil Minister Luaibi and two delegates expect that OPEC will probably maintain its 30mln bpd output limit. Furthermore, in the lead up to tomorrow's OPEC meeting in Vienna, the Saudi Arabian Oil Minister al-Naimi said the global oil market is 'in equilibrium'.
According to Iraq's Oil Minister Luaibi, Iraq are to export an average of 3.4mln bpd of oil in 2014, he also says that Kurds have agreed for Iraq central government to control oil sales.
North Korea's de fact no. two leader may have been removed from power according to South Korea's spy agency.
Rio Tinto reported an USD 800mln reduction in exploration and evaluation spend. Co. warned the pressures that led it to close the Gove alumina refinery in the Northern Territory are bearing down on its two refineries at Gladstone. Co. CEO also commented that the South of Embley bauxite project is on hold and that 2012 capex near USD 18bln is the peak for all time.
UBS cuts 2014 average gold price forecast to USD 1200/oz from USD 1325/oz, cuts 2014 average silver price forecasts to USD 20.5/oz from USD 25/oz and cuts 2015 average silver price forecasts to USD 21/oz from USD 24/oz.
DB's Jim Reid rounds out the overnight event recap
The market has been a little confused over the last 24 hours, not helped by the stronger than expected ISM (57.3 vs 55.1) providing further fuel to the December taper flame. The best thing for markets longer-term is to have sustainable growth and a normalisation in monetary policy. However over the next 6-12 months we think markets would perform notably better if sub-trend (but positive) growth and high liquidity continued. The latter scenario would be much less healthier longer-term though as asset prices would deviate further from fundamentals leaving gap risk between the two. So with the recent strength in the data we're building up to a fascinating payrolls this Friday and one that could shape the early part of 2014.
Drilling into the detail of the ISM, the November headline number was the highest since April 2011. Aside from the headline, there was notable strength across a number of subcomponents. This included new orders (63.6 from 60.6 previously - highest since April 2011); production (62.8 from 60.8 previously - highest since July of this year) and employment (56.5 from 53.2 previously - highest since April 2012).
In terms of the market reaction, perhaps the market confusion over the last 24 hours was best illustrated by the price action in equities. Indeed the S&P500 traded up immediately following the data print, managing to reach an intraday high of 1810 (or +0.25%), as equities initially cheered the ISM beat. However this move up was later retraced, before a late selloff saw the index finish at 1801 or -0.27% for the day. The reaction in the government bonds space was a little more predictable with UST yields increasing 5bp to close at just under 2.80%. Yesterday saw an interesting divergence between DM and EM credit. Credit markets in Europe and the US managed to put in a solid performance despite the dual headwinds of higher rates and sluggish equities. Indeed the benchmark European Crossover (-6bp), iTraxx (-2bp) and US IG (-1bp) indices all managed to close tighter on the day while on the cash side the iBoxx USD corporate index firmed by about 1bp. Meanwhile in EM, the CDX EM index widened by 8bp (and closed at the wides) and EM sovereign credit had a weak day across the board, particularly in LATAM where there was double digit yield increases in some sovereign names. The MSCI EM equity index (-0.5%) also finished at the lows and EM crosses such as USDTRY, USDMXN and USDBRL
all had days to forget.
In Europe the manufacturing PMI also surprised to the upside but there were regional variations. The headline euro-area number was up 0.3 points on the month to 51.6 or 0.1pt above the flash estimate. Stronger than expected readings in Germany (52.7 vs 52.5 flash, 51.7 Oct), France (48.4 vs 47.8 flash, 49.1 Oct) and Italy (51.4 vs 50.7 Oct) were offset by a sharp fall in Spain (48.6 vs 50.9 Oct). Our economists note that Italy’s better-than-expected November manufacturing PMI reading is the highest since May 2011. The improvement increases the likelihood that Italy will finally exit its nine-quarter long recession in Q4. Staying in Italy, markets will be hoping that PM Letta will be able to quickly form a new parliamentary majority that he hopes will allow him to pursue his reform agenda including a much sought after change in the country’s electoral laws. Letta reportedly met with President Napolitano yesterday for a round of institutional talks over the formation of a new ruling majority – and sources (Reuters) say that Letta is seeking another confidence vote that will hopefully help him consolidate parliamentary power. The strong dataflow was also evident in the UK, where a better than expected manufacturing PMI drove further gains in GBP and steeping of the gilt curve.
Turning to Asia, equities are trading mostly weaker, taking their lead from the late sell-off on Wall St. The Hang Seng (-0.5%), ASX200 (-0.45%) and KOSPI (- 0.9%) are tracking broadly lower this morning. Bucking the regional trend, the Nikkei (+0.6%) and TOPIX (+0.3%) are registering gains on the back of a higher USDJPY (+0.4% or 40 pips) which is now at multi-year highs of 103.4 as we type. The latest Yen weakness has been spurred by reports that the BoJ is planning scenarios for further easing, such as increasing purchases of equitylinked funds or buying riskier assets in an effort to accelerate growth and inflation. This comes after reports that some BoJ board members are skeptical that the BoJ’s growth and inflation forecasts will be achieved according to Reuters. On the topic of Japanese inflation, the latest labor ministry data showed today that regular wages excluding overtime and bonuses fell 0.4% in October from a year earlier, a 17th straight monthly decline. There was little reaction to the RBA’s policy announcement today where they left rates unchanged, as was universally expected by forecasters. In its post-meeting statement, the RBA kept its language that the AUD is “uncomfortably high”. The latest Chinese non-manufacturing PMI for November came in at 56.0 vs 56.3 prior.
In terms of other headlines, the latest from the start of the holiday retail season in the US is that Cyber Monday sales increased by around 19% from 2012 as of 9pm New York time last night, according to a statement from IBM. Smartphone and tablet user traffic accounted for 30% of total site visits, which is an increase of more than 58% from last year, IBM said. The strength of online sales stands in contrast to that of bricks-and-mortar sales, which as a number of surveys have suggested, have suffered their first spending decline on a Black Friday weekend since 2009.
Looking at today’s calendar, we have a brief lull in the data docket today with little scheduled across the Euroarea and the US to excite markets. The latest unemployment numbers in Spain and the November BRC retail sales data for the UK are the main data releases today in Europe. Across the Atlantic, auto sales and the IBD/TIPP economic optimism survey round out the day’s calendar. But it’s likely that markets will be in a holding pattern as we head into the business end of the week that starts with ADP employment tomorrow, the ECB on Thursday and ending with payrolls on Friday.