Futures Sneak Above 1800 Overnight But Yellen Can Spoil The Party

A sneaky overnight levitation pushed the Spoos above 1800 thanks to a modest USDJPY run (as we had forecast [44]) despite, or maybe due to, the lack of any newsflow, although today's first official Humphrey Hawkins conference by the new Fed chairman, Janet Yellen, before the House and followed by the first post-mortem to her testimony where several prominent hawks will speak and comprising of John B. Taylor, Mark A. Calabria, Abby M. McCloskey, and Donald Kohn, could promptly put an end to this modest euphoria. Also, keep in mind both today, and Thursday, when Yellens' testimoeny before the Senate takes place, are POMO-free days. So things may get exciting quick, especially since as Goldman's Jan Hatzius opined overnight, the third tapering - down to $55 billion per month - is on deck.

In market terms, positive sentiment that was evident overnight in Asia, which was buoyed by positive broker recommendation by JPM on Chinese banks and consequently saw Shanghai Comp. settle with gains of around 0.8%, carried over into the EU session, with stocks bid since the get-go. So much so that this also saw the S&P future trade above the key 1800 level for the first time since mid-Jan. Basic materials led the move higher in Europe, following trade update by Glencore and also Kazakhmys, with shares surging around 20% after Kazakhstan's central bank devalued its currency by the most since 2009. In terms of other notable equity movers, L’Oreal pared initial gains of over 2% supported by reports that the company is to repurchase EUR 6.5bln worth of shares from Nestle and gradually edged into negative territory following somewhat downbeat comments by the CEO on the outlook.

Turning to the day ahead, there is little on the European calendar aside from the earnings report from Barclays (although Barclay’s bottom-line numbers were prereleased to the market yesterday). Stateside, JOLTs job openings, wholesale inventories and MBA mortgage applications are the main data releases of note. As we mentioned above, the prepared remarks from Yellen’s testimony will be released at 8:30am US EST, with her formal testimony to follow 90 minutes later. Immediately following Yellen, the House Financial Services Committee will hear reactions to the Chairlady’s comments from Stanford University professor John Taylor, the Cato Institute's Mark Calabria, the American Enterprise Institute's Abby McCloskey and former Fed Vice Chair Don Kohn. Kohn, who was Fed vice chair before Yellen took the job in 2010, has been supportive of QE but the other three panelists are far more sceptical (Reuters). Nevertheless, the spotlight will remain squarely on Yellen today.

Overnight headline summary from Bloomberg and RanSquawk

EU stocks traded higher, with basic materials outperforming following trade update by Glencore and also Kazakhmys, with shares surging around 20% after Kazakhstan's central bank devalued its currency.
The second half of the session will see Fed's Yellen deliver her testimony on monetary policy to the House as well as the release of the latest API inventories and the US Treasury will kick off its planned issuance.
Chinese stocks were buoyed by positive broker recommendation by JPMorgan on Chinese banks, with analysts recommending buying Chinese banks.
Treasuries decline as Yellen prepares to appear before House committee at 10:00am and week’s auctions begin with $30b 3Y notes, yield 0.69% in WI after drawing 0.799% in Dec.
Yellen probably will indicate she plans continue trimming QE by $10b/meeting and back further away from FOMC’s 6.5% unemployment rate target
Employers with fewer than 100 workers won’t have to provide health insurance until 2016 under Obamacare, as the administration said it would again delay a key requirement of the health law
Barclays Plc will eliminate as many as 12,000 jobs this year after fourth-quarter profit tumbled, with about 7,000 of the cuts to be in the U.K.
Opponents of the EU, the euro and immigration claimed fresh momentum in the campaign for EU-wide elections after Switzerland voted to impose quotas on foreigners
The EU is pushing for “fair” elections in Ukraine to break a political stalemate between the government and protesters manning street barricades for almost three months
Kazakhstan’s central bank devalued its currency by the most since 2009 as Russia’s ruble weakens and reduced bond buying by the Fed sparks capital outflows from emerging markets
Sovereign yields mostly higher. EU peripheral spreads tighten. Asian, European stocks, U.S. stock-index futures rose. WTI crude, copper, gold gain

Asian Headlines

Japanese markets remained closed for National Foundation Day, while the rest of the Asia-Pacific equity markets rallied overnight, with the Shanghai Composite up 1.0% and the Hang Seng Index up 1.8% as of 0620GMT. Shanghai Comp. was buoyed by Financials after JPMorgan recommended buying Chinese banks and the CBRC ordered some smaller banks to set aside more funds to avoid a cash shortfall.

EU & UK Headlines

German Finance Minister Schaeuble says markets no longer doubt ECB and governments will do all that in necessary to defend EUR and said OMT has contributed to return of confidence in EUR but it is not the only or primary factor.

The book for the Portuguese syndication closed with orders in excess of EUR 4.5bln for the 10yr 2024 bond, with strong demand indicated.

ECB allots EUR 93.3bln in 7-day op to 111 bidders and EUR EUR 6.5bln in 1-month op to 30 bidders.

French public audit office says there is 'real risk' that the French public deficit overshot government target of 4.1% of GDP in 2013.

The Italian economy ministry have said they see no need for a publicly funded bad bank. (RTRS) This follows reports that a bad bank could be installed in the country to alleviate Italian bank's nonperforming loans ahead of the ECB's Asset Quality Review. However, Italian PM Letta was said to have been concerned this would prompt a sovereign downgrade for Italy.

UK BRC Sales Like-For-Like (Jan) Y/Y 3.9% vs. Exp. 0.8% (Prev. 0.4%); fastest annual growth since 2011. (BBG)

The BRC said with a record number of people in work and the continued recovery in the housing market, furniture and non-food items have performed very strongly.

US Headlines

Little in terms of US specific news flow, with focus firmly on the upcoming testimony by Fed's Yellen.

German DAX index outperformed its peers, with car markers leading the move higher after analysts at Goldman Sachs said that pricing outlook for Western European car sales is improving, raising BMW to buy rating. At the same time, UK retail names posted decent gains this morning after the BRC said that LfL sales for the month of Jan posted its fastest annual growth since 2011.

In spite of a weaker USD, USD/JPY traded higher, supported by the general risk on sentiment following positive close by major Asian equity indices. Analysts at Nomura forecast USD/JPY at 109.00 in 12-months, also noting that the key driving force for stronger USD is the Fed starts tapering next year and the BoJ increases their asset-purchase program. At the same time, AUD/USD trended higher and rose to its highest level since mid-Jan on the back of higher metal prices and also weaker USD.

Commodities

According to analysts at UBS, gold close above USD 1,293 to send price towards USD 1,338.

According to analysts at Commerzbank, OPEC may adjust output to keep prices up and expect that Saudi Arabia will scale back its oil production so as to prevent any price fall, meaning that the oil price is likely to remain within its recent trading band. (DJN)

China may import 35mln mt of crude from Iran in 2014. Furthermore, China may import total of 310mln - 420mln mt yr of crude in 2015-2020, Yue Laiqun, according to researcher at Land and Resources Ministry. (CNPC)

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DB's Jim Reid concludes the overnight event recap

The House Financial Services Committee is the forum for today's eagerly awaited debut testimony from Chairlady Yellen. Perhaps some of the recovery in markets in the last few days is based on expectations that she'll be fairly dovish. Such a view is justifiable based on her past but this testimony is traditionally one reflecting the view of the Fed overall. As such she'll probably keep fairly close to the recent FOMC script. It’s too early for the recent weaker data to influence the Fed's tapering plans (especially given weather uncertainties) and she'll no doubt remain confident that the US recovery is building and broadening. Any updates on forward guidance now that the 6.5% unemployment rate is within 0.1% of being breached will be a key focal point. Also how she interprets the current low inflation may contribute to how dovish the testimony is seen. The Q&A will wrap up the event and it'll be interesting if the 2014 EM wobbles become a talking point or not. The full text of Yellen’s prepared remarks will be made available at 8:30am USEST (90 minutes before she officially appears before the House Financial Services Committee). The question and answer session after might be where we get the real headlines.

Asian markets have recovered from a soft start overnight with gains across the Hang Seng (+1.8%) and KOSPI (+0.6%). While Japanese markets are closed for National Foundation Day, in the FX space USDJPY (-0.05%) is testing the 102 level. Following yesterday’s record Japanese trade deficit (for December), the Nikkei ran a story suggesting that excessive optimism over the benefits of a weaker yen have raised the threat of twin deficits in Japan. The article suggested that Japan is unable to reverse a trade deficit, even with a weaker yen, because industry is increasingly moving overseas and some market participants have lost confidence in the effect of the J-curve (initial trade deficits followed by significant trade surpluses). However DB’s FX strategist James Malcolm believes that markets are being insufficiently patient and that the impetus from the USDJPY should only be kicking in around now and should be very powerful in the months to come.

Elsewhere in Asia, there are further negative headlines out of China’s banking sector suggesting that the banking regulator has ordered some smaller banks to set aside higher reserves to strengthen liquidity (HK Wenweipo). This isn’t hurting Chinese bank equities which are up around 2-3% today, and are leading gains on the HSCEI (+2.5%). Perhaps anticipating a dovish Yellen today, gold is up 0.8% and is poised to close higher for its 8th time in the last ten Yesterday the S&P500 (+0.16%) extended its positive run to three days and we are gradually climbing back towards the mid January levels before we had the EMinspired sell off of late Jan/early Feb. There was little to speak about in terms of economic data which probably explained the narrow trading ranges that we saw in both the S&P500 (8pts) and Dow Jones (68pts), both which were the smallest ranges that we’ve seen for the last few weeks. We saw similarly narrow ranges in treasuries (10yr yields -1.6bp) and credit (CDX IG +0.125bp) so it appears that most are in wait-and-see mode ahead of Yellen. There was more action in emerging markets where we saw Brazil (+5bp), Mexico (+4bp) and Turkey (+10bp) CDS underperform.

For those looking for more clues on the weather’s impact on January activity, McDonald’s gave a sales update which seemed to suggest that its US revenues were indeed affected by the winter storms. The fast food chain reported that global comparable sales grew 1.2% Y/Y in the month of January – however sales in the United States were 3.3% lower. The company said that “severe winter weather” had dragged on US sales but we should also note that the company flagged other “broadbased challenges” behind the company’s US results which have disappointed in recent months. Nonetheless it adds to other anecdotal indicators, including January auto sales, suggesting that inclement weather had impacted on the level of economic activity.

Yesterday we highlighted the more cautious tone amongst some, including the FT’s Wolfgang Munchau, to the German Constitutional Court’s deliberation on the OMT programme. Our German economists published an updated view which provides a more cautious view on the GCC’s decision saying that the Court did not refer the case to the ECJ but instead sent a list of specific questions regarding the legality of OMT to the ECJ. The GCC will put on hold its inquiry on OMT until it gets the legal opinion from the ECJ. But in the end, it will be the German Court that gives the final ruling on the complaints – only taking into account the legal opinion of the ECJ. In its declaration the GCC states that it regards the OMT decision as exceeding the competences that were given to the ECB through the European Treaties. It considers OMT as not being covered by the mandate of the ECB on monetary policy (Art. 119 and 127 TFEU) and in violation with the prohibition of monetary financing of the budget (Art. 123 TFEU). Given the strong demand for periphery debt at the moment this story isn't likely to be much of a driver for now but it’s important to follow as it could influence the ECB's policy making in the months and years ahead.

Back in the US, the debt ceiling continues to be a slow-burning issue but it’s likely this will start to generate more noise the closer we get to Treasury Secretary’s Jack Lew’s February 27th deadline for when the so-called “extraordinary measures” are exhausted. House Republicans are still plotting out a strategy to raise the debt ceiling, with conservative lawmakers looking to extract at least a few concessions for an increase, but a large contingent fearing the impact of another financial showdown in a midterm election year. Bloomberg highlighted that there isn’t too much time for political leaders to come to agreement as Congress plans to be out of session the week of Feb. 17 and will return to Washington the week of Feb. 24. One-month T-Bill rates dropped 4bp yesterday to a yield of 0.06% so few concerns at the moment.