No Overnight Levitation In Quiet Markets

The positive momentum in equities slowed in Asian trading with losses seen on the Nikkei (-0.4%), and HSCEI , the SCHOMP unchanged and EM indices such as the Nifty (-
0.1%). In Australia, a disappointing December employment report saw a 23k fall in jobs for the month against consensus expectations of rise of 10k. The 10yr Australian government bond has rallied 5bp and the front end is outperforming as a number of investors expect the RBA to continue its easing bias over 2014. AUDUSD has sold off -1.1% to a three year low of 0.881. The ASX200 closed up 1.2% however, boosted by mining-giant Rio Tinto (+2%) who reported better than anticipated Q4 production. Amid recent fears of a Chinese growth deceleration, Rio Tinto reported record levels of production of iron-ore, coal and bauxite. In FX, USDJPY is finding further support in Asia, adding 0.1% to yesterday’s 0.38% gain to trade not too far from the 105 level. Which is also why the S&P futures are trading modestly lower: without a major breakout in the Yen carry, there can't be a sustained ramp in the US stock market which is driven entirely by the value of the Yen, which in turn is a reflection of the expectations of future BOJ easing.

Stocks in Europe traded lower this morning, with basic materials outperforming following trading update by Rio Tinto, but the focus was on aggressive AUD weakness which was observed overnight following the publication of the latest jobs report. Broad based selling pressure saw AUD/USD fall to its lowest level since August 2010 and in turn depressed investor appetite for precious metals, with spot gold and silver trading lower as a result.

Nevertheless, despite softer metal prices, other UK listed miners opened in the green and given the heavy weighting that commodity names have in the FTSE-100 index ensured that the index outperformed its EU peers.

Looking elsewhere, the Spanish Treasury sold EUR 5.91bln worth of bonds vs. Exp. EUR 4.5-5.5bln and despite softer bidding, as evidenced by lower b/c and large tails, saw SP/GE 10y bond yield tighten. At the same time, touted profit taking following the recent tightening bias, together with somewhat cautious sentiment saw peripheral EU
spreads widen.

Today’s economic calendar looks relatively full, starting with a number of global CPI reports including the final inflation prints for Germany and the Euroarea which will be followed by the US CPI. Bloomberg consensus for the US print is +0.3% MoM in the headline (vs 0.0% previous) and +0.1% MoM in the core (vs 0.2% previous). Investors will be keen to see whether the Philly Fed manufacturing survey today confirms the strong manufacturing momentum of yesterday’s Empire Fed. The rest of the US data includes initial jobless claims and the NAHB homebuilder sentiment index – the former will be particularly interesting in light of the recent NFP miss. Chairman Bernanke speaks on “The Fed Yesterday, Today and Tomorrow” at an event hosted by the Brookings Institution. Other speakers at the event include the San Francisco Fed’s John Williams, Former deputy BoE governor Paul Tucker and Harvard University’s Kenneth Rogoff. The earnings season rolls on with quarterly updates from Goldman Sachs (pre-market), Citigroup, Intel and AMEX.

US Event Calendar and expectations

8:30am: CPI m/m, Dec., est. 0.3% (prior 0.0%); CPI Ex Food and Energy m/m, Dec., est. 0.1% (prior 0.2%)
8:30am: Initial Jobless Claims, Jan. 11, est. 328k (prior 330k); Continuing Claims, Jan. 4, 2.850m (prior 2.865m)
10:00am: Philadelphia Fed Business Outlook, Jan., est. 8.6 (prior 7, revised 6.4)
10:00am: NAHB Housing Market Index, Jan., est. 58 (prior 58) Central Banks
9:00am: Fed’s Williams speaks in Washington
11:10am: Fed’s Bernanke speaks in Washington Supply
11:00am: Fed to purchase $1b-$1.5b in 2036-2043 sector

Overnight Headline Bulletin from Bloomberg and RanSquawk

Basic materials has been the outperforming sector following an update from Rio Tinto despite European stocks trading lower this morning
AUD has been the underperforming currency in FX markets throughout the session following a disappointing jobs report
Fixed income markets have seen a tightening of the SP/GE spread after the Spanish treasury sold more than the indicative range for their bond auction
Treasuries steady after yesterday’s decline on stronger than forecast Empire Manufacturing and core PPI and amid continued strong IG issuance; $45b has priced this week after $20.825b yesterday.
Dealers from Royal Bank of Scotland Group Plc to UBS AG that gutted their credit units after the 2008 financial crisis are now hiring to trade junk debt, seeking to tap into the biggest fixed-income gains during the past year
China’s benchmark money-market rate rose by the most this month as the central bank refrained from adding funds even as dealers expect tax payments and pre-holiday demand to reduce the supply of cash
Australian employers unexpectedly cut jobs in December, capping the worst year of full-time losses since 1992, sending the Aussie to the lowest in more than three years and reviving prospects for interest-rate reductions
Bank of England officials discussed trading practices around key forex benchmarks with senior currency dealers 18 months before regulators opened formal investigations into alleged rate-rigging
The ECB favors requiring banks to show their capital won’t fall below 6% of their assets when it puts them through a simulated recession later this year, said two euro-area officials with knowledge of the matter
The House passed a $1.1t bipartisan spending bill to finance the U.S. government through Sept. 30
Egypt’s overhauled constitution was approved by at least 90% of voters, according to unofficial results of a referendum seen as a litmus test of the military-backed government’s declared plan to restore democracy
Sovereign yields mostly lower; EU peripheral spreads widen. Nikkei -0.4%; Shanghai little changed. European equity markets and U.S. equity-index futures decline. WTI crude higher, copper and gold lower

Asian Headlines

Fitch says Japan's debt-to-GDP ratio won't stabilize until 2020 and says the nation's external deficit highlights fiscal risks. (BBG)

China's Ministry of Commerce said that export and import growth may be volatile in Q1, that it is cautiously optimistic about trade outlook this year and that it may be difficult for China's 2014 trade growth to exceed 2013 growth. (BBG)

EU & UK Headlines

Spanish bond auction results: sells EUR 5.91bln vs. Exp. EUR 4.5-5.5bln. (BBG/RTRS)

- Sells EUR 2.66bln in 2.10% 2017 Bonos, b/c 2.2 (Prev. 3.62) and avg. yield 1.595% (Prev. 2.182%), tail 2.5bp (Prev. 2.1bp tail) - record low yield.

- Sells EUR 1.44bln in 5.15% 2028 Obligaciones, b/c 1.99 (Prev. 2.7) and avg. yield 4.199% (Prev. 4.192%%), tail 2.4bp (Prev. 0.6bp tail)

- Sells EUR 1.81bln in 5.90% 2026 Obligaciones, b/c 1.41 (Prev. 2.4) and avg. yield 3.977% (Prev. 4.469%), tail 3.5bp (Prev. 1.1bp tail)

Eurozone CPI (Dec F) Y/Y 0.8% vs Exp. 0.8% (Prev. 0.8%)
- Eurozone CPI (Dec) M/M 0.3% vs Exp. 0.3% (Prev. -0.1%)
- Eurozone CPI Core (Dec F) Y/Y 0.7% vs Exp. 0.7% (Prev. 0.7%)

ECB's Weidmann says buying government bonds risks blurring line between monetary and fiscal policy. He also said that low interest rates can give impulse to economy, dont just have negative rates and that he sees German economic upswing continuing this year and next. (BBG/RTRS)

UK RICS House Price Balance (Dec) 56% vs. Exp. 60% (Prev. 58%) - Expectations hit a 14-year high. (BBG)

RICS global director King said unless we see a marked increase in the number of homes coming up for sale we could well be looking at price rises becoming unsustainable in some areas.

US Headlines

RealtyTrac reported that foreclosure activity in the US declined 26% in the year 2013, and was the lowest annual total since 2007. (www.realtytrac.com [43])

China's Treasury holdings rose USD 12.2bln to a record USD 1.32bln in November, according to Treasury data which also showed US net long-term portfolio securities outflow of USD 29.3bln in November. (BBG)

Equities

Basic materials related stocks outperformed on the sector breakdown, after Rio Tinto reported record levels of iron ore production for Q4 as it boosted production at its mines in the Pilbara region in Western Australia.

As a result, given the heavy weighting that commodity names have in the FTSE-100 index meant that the index outperformed its EU peers, with the likes of Glencore, BHP Billiton and Anglo American, all trading with gains of over 2%.

Going forward, market participants will get to digest earnings by Citi, GS, Intel and American Express.

AUD fell sharply across the board overnight following the release of the latest jobs report which showed that the country suffered its lowest annual jobs growth in 17 years. At the same time, the report revealed that the participation rate fell to 64.6% in December, the lowest level since 2006. Looking elsewhere, EUR/AUD and GBP/AUD, both rose sharply and above its 21DMA lines to its higher since 2nd Jan.

Also of note, Brazil Central Bank raised its benchmark lending rate 50bps to 10.50% vs. Exp. 10.25% (Prev. 10.00%) (BBG)

Commodities

Iran expects agreement with OPEC on oil quotas according to Zarif. (BBG)

Operations are normal at Libya's Sharara field as protesters are satisfied with the government's response to their demands. (BBG)

A consensus of analysts expects the US EIA on Thursday will estimate a record withdrawal from natural gas storage between 300Bcf and 304Bcf for the reporting week that ended Friday. (Platts)

Rio Tinto reported record levels of iron ore production for Q4 as it boosted production at its mines in the Pilbara region in Western Australia. Co. announced Q4 attributable iron ore output of 55.5mln tons vs. Exp. 55.7mln tons and 2013 global iron ore output at 266mln tons while global iron ore shipments for 2013 were 259mln tons on 100% basis. (BBG)

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We conclude with the usual roundup from DB's Jim Reid

Aside from the PPI report (and ahead of today’s US CPI), there was a fair bit of talk yesterday about the path of inflation. The Fed’s Beige Book, which was compiled by the Boston Fed, noted that “upward movements in wages were cited by 8 out of the 12 districts”. DB’s Joe Lavorgna points out that although the increases were described as “small to moderate”, this is up substantially from the three districts that reported wage increases in the last report and could have a bearing on the outlook for income growth and inflation. DB’s George Saravelos argued that with UK and US unemployment rates approaching central bank forward thresholds, it will be more difficult to anchor expectations and the focus will shift to wages as an indicator of the state of the labour market. George thinks that the more permanent the decline in the participation rate in the US for instance, the faster and quicker wage growth will revert. Meanwhile, the Chicago Fed’s Charles Evans and IMF’s Christine Largarde had different perspectives on inflation yesterday with both warning about the dangers of disinflation, and Lagarde going as far as saying that deflation was a serious threat to economic growth. Evans assured that the Fed would be in no hurry to raise rates, even if unemployment fell below thresholds, given that inflation pressures remain very low. He also mentioned that without the lift of rising prices, debt becomes more burdensome than expected and the economy slows. He forecast inflation to rise only gradually, approaching 1.5% by the end of next year. The IMF’s Christine Lagarde warned of the “rising risk of inflation” which “could prove disastrous for the recovery” in a speech at the National Press Club in Washington. 10yr US breakeven yields added 2bp yesterday, and have now increased by 15bp over the last month or so.

Yesterday proved to be another strong day for banks on both sides of the Atlantic. European bank stocks recorded a small pop (+2.6%), handily outperforming the broader Stoxx600 (+0.99%), on reports that the ECB’s upcoming stress tests will not require banks to mark-to-market sovereign exposures in hold-to-maturity portfolios. A number of peripheral European banks such as Banca Popolare di Milano (+5.1%), BBVA (+4.0%) and Banco Popolare (+4.2%) topped the list of outperformers – and they were helped by another solid session for periphery European bond yields which continued to tighten to bunds. Moving Stateside, Bank of America’s solid Q4 earnings beat provided the catalyst for US banks (+1.99%). A number of analysts pointed out that the result was boosted by large reserve releases, but it’s fair to say that both interest and capital markets revenues were quite strong while expenses were fairly flat. Divisionally, Bank of America’s earnings had a similar theme to that of JP Morgan’s results on Tuesday: BofA’s investment banking (+34% q/q) and FICC (+2% q/q) divisions performed well while equities (-3% q/q) tracked backwards on sequential basis. Bank of America’s stock jumped 2.3%, and the positive sentiment allowed the bank to price a jumbo $6.1bn senior unsecured bond deal yesterday. The two biggest tranches of the deal, the $2bn 30yr bond and the $2.5bn 10yr bond priced at T+120bp and T+125bp respectively, both at the bottom end of guidance. Indeed, it was busy day for bank bond issuance with deals launched or priced by Credit Agricole, Rabobank and Unicredit, amongst others.

On the topic of earnings, we’ll briefly review the first week of the US reporting season which has seen about 31 S&P500 companies report thus far. Of these companies, about 20 (or roughly two-thirds) have beaten the Street’s consensus revenue estimates and a similar number have beaten the Street’s earnings estimates. The interesting thing to note is that the worst sector for revenue and earnings misses has been the retail sector which has accounted for about half of the earnings disappointments thus far. It’s still clearly early days but this is a trend worth noting following a number of recent profit downgrades and earnings misses from retailers and consumer-discretionary stocks.

No Overnight Levitation In Quiet Markets - Full Recap