A slew of favorable overnight news, including a stronger than expected German IFO business climate print, reports that Draghi has signalled he would be prepared for the ECB to buy packages of bank loans to households and companies, when he said "the ECB might be able to buy securitised bank loans if they could be packaged as asset-backed securities in a transparent manner" (a QE-lite will hardly make the market happy), a largely expected bail out of the Chinese Trust Equals Gold imminent default (more in a subsequent post), as well as the announcement of Argentina's new liberalized dollar purchase capital controls (which have a monthly purchase limit as well as a minimum income threshold), not to mention the traditional USDJPY levitation which drags all risk along with it, were unable to put an end to the ongoing rout in emerging markets, which saw the Turkish Lira collapse to fresh record lows before it jumped on news the Turkish Central Bank would hold an extraordinary meeting tomorrow (if the recent intervention by the CB is any indication, watch out), not to mention the Ruble, Zloty and even the Ukraine Hryvna dump as the outflows from EMs continued over a mixture of tapering fears as well as concern that the one way fund flow would accelerate creating its own positive feedback loop.
Is today the day the fund flow exodus will finally be halted? Stay tuned to find out and keep a close eye on the USDJPY - the most manipulated, confiduing-boosting "asset" in the world right now, more so than gold even.
Overnight headline bulletin
- Treasuries decline to start the week in partial reversal of last week’s haven flows that sent 10Y yields to lowest since mid-Nov.; first U.S. auction of floating- rate notes tomorrow, Fed decision Wednesday amid expectations QE will be pared by another $10b.
- Industrial & Commercial Bank of China Ltd. said investors in a troubled high-yield trust can recoup their funds, averting a threatened default that underscored concern over the shadow- banking system and helped spur a selloff in emerging-market currencies and stocks
- China’s trade numbers, distorted by fake exports last year, are set to come under renewed scrutiny after a discrepancy between Hong Kong and Chinese figures for bilateral trade widened to the largest in eight months
- China’s one-year interest-rate swap fell to the lowest level in more than a month on speculation the central bank will seek to bring down funding costs to support a slowing economy and curb the risk of defaults
- German business confidence as measured by the Ifo institute rose to the highest level in more than two years, reaching 110.6 in January from 109.5 in December
- U.K. business leaders attacked the opposition Labour Party’s plan to raise the top rate of income tax to 50% as a “backward step” that would damage the economy and put jobs at risk
- Ukraine’s political crisis deepened over the weekend as President Viktor Yanukovych’s offer to share power with the opposition failed to end anti-government unrest, raising the stakes for a special parliament session tomorrow
- Republican lawmakers said Obama risks antagonizing an already polarized Congress by threatening to use executive authority to make good on the policy agenda he will outline in his State of the Union address
- Sovereign yields mixed; Greek yield surge while U.K. 10Y yields decline; EU peripheral spreads narrow. Asian equity markets slide, Nikkei -2.5%, Shanghai -1%; European markets lower, U.S. equity-index futures post slight gains. WTI crude, copper higher; gold falls
More on what has transpired in global capital markets overnight from RanSquawk:
The release of better than expected German IFO survey, together with reports that ECB’s Draghi has signalled that he would be prepared for the ECB to buy packages of bank loans to households and companies failed to support stocks this morning, which traded lower since the get-go after BG Group (-15%) cut forecast and AT&T declared that it does not intend to make an offer for Vodafone (-5%). As a result, the FTSE-100 index underperformed its peers, with telecoms as the worst performing sector in Europe, closely followed by oil & gas. Also of note, Banca Popolare di Milano shares came under significant selling pressure this morning, which consequently weighed on other small Italian banking names after the bank approved capital hike of up to EUR 1.5bln.
Looking elsewhere, despite the risk averse sentiment, Bunds traded lower, as the looming supply, together with lack of any meaningful credit spread widening weighed on prices. At the same time, EM markets remained in focus, with pressure on TRY and others amid concerns over capital outflow.
Going forward, market participants will get to digest earnings by tech giant Apple and industrial heavy weight Caterpillar, as well as the release of the latest US New Home Sales report.
Asian Headlines
China credit trust have reached a pact to sell trust assets. China Credit Trust previously told investors it is in talks to raise the funds to pay off debts prior to maturity, which would otherwise lead to a landmark default in China's shadow-banking sector. It was then later reported investors in Chinese trust marketed by ICBC are to get repayment offer. (BBG)
EU & UK Headlines
German IFO Business Climate (Jan) M/M 110.6 vs. Exp. 110.0 (Prev. 109.5)
- German IFO Current Assessment (Jan) M/M 112.4 vs. Exp. 112.4 (Prev. 111.6)
- German IFO Expectations (Jan) M/M 108.9 vs. Exp. 108.0 (Prev. 107.4)
ECB President Draghi signalled that he would be prepared for ECB to fight deflation in Europe by buying packages of bank loans to households and companies. (FT) When asked on QE, Draghi said “I’m not saying it should or it should not be done, but the ECB might be able to buy securitised bank loans if they could be packaged as asset backed securities in a transparent manner. (BBG/RTRS)
Barclays preliminary pan-Euro agg month-end extensions: +0.12y (12m avg. +0.07y)
Barclays preliminary Sterling month-end extensions:+0.19y
US Headlines
Going forward, market participants will get to digest earnings by tech giant Apple and industrial heavy weight Caterpillar, as well as the release of the latest US New Home Sales report.
Barclays preliminary US Tsys month-end extensions:+0.06y (12m avg. +0.07y)
Equities
The FTSE-100 index underperformed its peers since the open this morning, with Vodafone and BG Group under heavy
selling pressure. At the same time, financials remained out of favour amid the ongoing concerns over EM markets, together with reports that Italian listed Banca Popolare di Milano approved capital hike of up to EUR 1.5bln.
However, unlike last week, this failed to lead to aggressive credit spread widening and instead spreads remained tighter, likely supported by reports citing Draghi who said that the ECB is ready to buy packages of bank loans to households and companies.
FX
EM currencies remained under pressure this morning, with the spot TRY rate advancing to a fresh record high before reports that the Turkish central bank to hold an extraordinary meeting tomorrow sent the pair lower. However, other EM currencies such ZAR continued to weaken against the USD, rising to its highest level since October 2008 this morning.
Elsewhere, despite the ongoing concerns over EM outflows, USD/JPY remained bid, with the 1-month implied vol rate also better bid as the pair traded in close proximity to what is said to be a large option expiry level at 102.50.
The Turkish economy minister has said an economic crisis in the country is impossible, adding that the central bank has sufficient reserves to serve the market. (BBG)
Commodities
Morgan Stanley sceptical 'blow-out' in WTI-Brent is imminent and sees narrowing of WTI-Brent instead of widening. (BBG)
Indian government officials, Chidambaram and Bose, have said gold smuggling has risen in India and that India can revisit gold import curbs by end of this fiscal year, once current account deficit is controlled. (BBG)
Deutsche Bank wants to sell its place in the global gold and silver setting process, and is talking to prospective buyers, sources familiar with the situation said on Friday. (RTRS)
Fitch said Chinese aluminium prices are to remain low for the next 2 years. (BBG)