Overnight Rally, Driven By "Creative" Chinese Trade Data, Fizzles

After initially sending the all important USDJPY carry pair - and thus all risk assets - into rally mode, the initial euphoria over manipulated Chinese trade data (see China Trade Puzzle Revived as Hong Kong Data Diverge [32]), has all but fizzled and at last check the USDJPY was sliding to its LOD, approaching 102 from the wrong side. That, and a statement by the ECB's Coeure that the ECB is "very seriously" considering a negative deposit rate (and that the OMT is ready to be used even though it obviously isn't following the latest brewhaha from the German top court) have so far defined the overnight session, the latter having sent the EUR sliding across all major pairs.

Elsewhere, stocks traded higher since the get-go in Europe, supported by positive macroeconomic data from China and also better than expected earnings by SocGen and ING. As a result, financials led the move higher, with basic materials not too far behind. Renewed risk on sentiment, together with 10y EFSF bond syndication weighed on core EU fixed income products, with Gilts also under pressure after the BoE refrained from adjusting forward guidance. In its eagerly awaited QIR, the Bank kept the 7% unemployment threshold and pointed to high spare capacity, which the MPC seeks to gradually absorb. Much more aggressive steepening of the UK curve was avoided largely by the fact that the Bank said that it will continue to reinvest proceeds of maturing QE Gilt holdings at least until it start to raise rates, adding that it sees scope to keep 0.5% rate after jobless threshold hit. Nevertheless, failure to adjust knockout clauses supported GBP, which heading into the North American open is the clear outperformer vs. its peers. Going forward, market participants will get to digest the release of the latest DoE report, 10y note auction by the US Treasury and also earnings by Cisco.

Turning to the day ahead, in Europe we get an update on Euroarea industrial production and Draghi will be making a speech in Brussels entitled “Progress through Crisis”. But the spotlight will be on the BoE’s quarterly inflation report and how Carney will augment the bank’s forward guidance. DB’s UK economist George Buckley expects the Bank to move to unspecified time-dependent guidance from its current specific state dependent policy guidance. Again, theres not too much US data on the horizon today so the focus will be on a couple of speeches from the Fed’s Bullard and Lacker.

Headline bulletin from Bloomberg and RanSquawk

Treasuries fall for a second day, 10Y yield rises toward 100-DMA at 2.742%; quarterly refunding continues today with $24b 10Ys, WI bid 2.765% after drawing 3.009% at last sale.
Yesterday’s 3Y auction stopped through, aided by selloff into 1pm bidding deadline; 42% indirect award was highest, primary dealer award lowest since August 201l
China’s trade growth unexpectedly accelerated in January, with exports +10.6% and imports +10%, defying signs the world’s second-largest economy will slow while fueling speculation that fake shipments are resurfacing
Bank of England Governor Mark Carney renewed his pledge to keep interest rates at a record low in a new “phase” of forward guidance to combat persisting slack in the British economy
28 Republicans, including Speaker Boehner and many in his leadership team, joined with Democrats to pass a suspension of the debt ceiling until March 15, 2015
Health insurers told to pay $150 billion in taxes over a decade to help fund Obamacare are now shifting at least part of that cost back to taxpayers
A potentially historic winter storm threatens to coat Georgia with ice, knocking out power and grounding thousands of planes, before bringing snow to Northeastern cities including Washington and New York
Sovereign yields higher. EU peripheral spreads tighten. Asian, European stocks, U.S. stock-index futures gain. WTI crude and copper higher, gold falls
GBP supported by BoE's decision to keep 7% unemployment knock-out threshold, with Carney saying that the Bank sees scope to keep 0.5% rate after jobless threshold hit.
EUR is under broad-based pressure after ECB's Coeure said the ECB is considering a negative deposit rate very seriously.
Late yesterday, the House of Rep. voted to suspend the US debt limit until Mar'15, the vote now goes to the Senate where they are expected to vote as soon as today.

US Event Calendar

7:00am: MBA Mortgage Applications, Feb. 7 (prior 0.4%)
8:45am: Fed’s Bullard speaks in New York
10am: New York Fed issues small business credit survey
10:30am: ECB’s Draghi speaks in Brussels Supply
11:00am: POMO - Fed to buy $1b-$1.25b in 2036-2043 sector
1:00pm: U.S. to sell $24b 10Y notes
2:00pm: Monthly Budget Statement, Jan., est. -$10b (prior +$2.9b)

Asian Headlines

Nikkei 225 settled up 0.56%, supported by better than expected data from China and also in reaction to Fed’s Yellen testimony where the head of the bank preached policy continuity. As a result, JPY swaps curve bear-steepened up to 10y and bear-flattened in the longer-dated section of the curve. In Japan specific news, BoJ's Kiuchi said more easing may do more harm than good. (Nikkei)

Chinese Trade Balance (USD) (Jan) M/M 31.86bln vs. Exp. 23.45bln (Prev. 25.64bln)
- Chinese Exports (Jan) M/M 10.6% vs. Exp. 0.1% (Prev. 4.3%)
- Chinese Imports (Jan) M/M 10.0% vs. Exp. 4.0% (Prev. 8.3%)

EU & UK Headlines

BoE see scope to keep 0.5% rate after jobless threshold hit, keeps 7% unemployment threshold. (BBG/ RTRS/DJN)

Any increases in BoE rate should be limited and the MPC will seek to absorb all spare capacity. The governor also said that the Bank will not be giving time contingent guidance.

Also of note, BoE's Bean said that the Bank wants to start tightening policy before slack is completely eliminated.

Italy's centre-left PD coalition leadership are due to discuss Italian PM Letta's latest reform proposals, but expectations are rising that the PM would fail to win his party's support and be forced to resign. (FT) The reports follow a continued power-struggle between PM Letta and the PD head Matteo Renzi. ECB's Coeure says the ECB is considering a negative deposit rate very seriously. (RTRS)

US Headlines

The House of Representatives voted to suspend the US debt limit until March 2015, giving a victory to Democrats who said the ceiling could be lifted without conditions. The measure passed 221-201. (C-Span) The vote now goes to the Senate where they are expected to vote as soon as today.

Equities

Despite broad based gain by major EU equity indices, the FTSE-100 index underperformed its peers, as a number of blue-chip names such as Shell and BP traded ex-dividend. In terms of notable movers, WM Morrison shares surged higher at the open as market participants reacted to press reports citing sources which indicated that the founding family of the company are reported to have contacted private-equity funds such as CVC Capital Partners and Carlyle Group to weigh their interest in taking the retailer private.

GBP/USD advanced to its highest level since 30th January after the BoE kept the unemployment knock-out threshold unchanged at 7%, with the governor adding that the Bank sees scope to keep 0.5% rate after jobless threshold hit.

At the same time, EUR came under broad based selling pressure and CHF depreciated vs. EUR and the USD (lost around 50pips in the process) after ECB's Coeure said that the ECB is considering a negative deposit rate very seriously.

Looking elsewhere, despite the risk on sentiment, USD/JPY traded lower, weighed on by a weaker USD and also lower trending EUR/JPY cross which accelerated the price action following Carney inspired GBP gains.

Commodities

China's crude oil imports rose 11.9% in January from a year earlier to a record 6.63mbpd, as companies restocked ahead of the Lunar New Year holiday despite tepid demand growth. (BBG)

Technical analysis by Citi and RBC sees gold prices extending their current 2014 rebound and reaching USD 1,400 on a 100-day average. With patterns signalling prices will rally 8.5% by the end of March according to Citi. (BBG)

DB's Jim Reid concludes the overnight summary:

There's no stressing the market at the moment as the three main macro events of the last few days have all ended the same way - in a large market rally. First we had a less dovish Draghi than expected (S&P 500+1.24%), then a weak payroll report (S&P 500+1.33%) and now a Yellen testimony that to most people appeared on message (S&P 500 +1.11%). All three could have been spun a different way market wise so the rally seems to have been independent of these event's contents but more to do with positioning going into them.

Nevertheless, risk assets have been on a roll during the past week, and it seems that memories of January’s wobbles are quickly fading. Indeed, if we look at the major equity indices the S&P500 is only about 1.5% away from being flat on the year after being down by more than 5.5% at one stage in late January. The Stoxx600 is now back to being up (+0.4%) on the year. Outside of equities, the major credit indices are slowly grinding their way back to the tights posted at the start of the year. The US CDX IG index and European iTraxx are just a few bps away (2bp to 3bp) from their 2014 starting points. Meanwhile the higher beta European Crossover is now 7bp tighter than at the start of the year. So broadly speaking, DM equity and credit markets have mostly reversed January’s sell-off, but EM continues to lag with the MSCI EM equity index still down 5.8% YTD while the CDX EM credit index is almost 50bp wider over the same period.

In Asia the latest Chinese trade numbers have helped set the tone for overnight session in spite of doubts about the robustness of the data. Following the recent spate of mixed Chinese data, the latest Customs report showed that January Chinese exports rose 10.6% Y/Y (vs expectations of 0.1% growth) and imports rose by 10.0% Y/Y (vs expectations of 4% growth). The data is especially surprising given that the traditional slowdown for Chinese New Year fell in January this year versus February last year. January’s rate of import growth was a seven month high, and the level of China’s imports of crude oil, iron ore and copper all rose to all-time highs for a January, according to Customs data - which is positive news for some of the resource-focused EMs. All this brought China’s monthly trade balance to +$32bn (vs consensus $23bn) although we always need to be wary of data seasonality during the Chinese New Year period. Bloomberg is also carrying the story as one where false invoicing might be artificially boosting the numbers. The AUDUSD added 30pips to trade back above 0.905 following the trade numbers and equities on the ASX200 (+1.1%) and Nikkei (+0.8%) are better bid, led by cyclicals. Copper is 0.6% firmer and gold (-0.4%) has given back some of its outperformance over the past fortnight. There was a relatively muted reaction in other asset classes. 10yr Australian government bonds sold off by 2bp following the data and US 10yr yields are unchanged at around 2.72%. As we type, the South China Morning Post is reporting that another Chinese investment product is in danger of defaulting. The product, which raised 289 million yuan from clients of China Construction Bank (CCB) was created by Jilin Province Trust and backed by a loan to a coal company, Shanxi Lianmeng Energy (SCMP).

Back to the main event of yesterday, Yellen’s first testimony as Fed Chair didn’t contain too many surprises, despite what the price action in treasuries (+6bp), equities and gold (+1.3%) indicate. Most of the market moves came immediately after the prepared remarks were released to the public and there was relatively little reaction to the remainder of Yellen’s near six-hour testimony. Yellen highlighted that she planned to continue the policies adopted under her predecessor namely by continuing the QE taper in measured steps. The Fed Chair said that it would take a “notable change” in the outlook for this to be paused. In a nod to the doves, she mentioned that the labour market recovery was “far from complete” and that as a result the Fed would remain extraordinarily accommodative. Yellen mentioned two labor market trends—the share of people who have been unemployed for more than six months and the high percentage of people who are working part-time but want full-time employment—as factors effectively mitigating the improvement in the unemployment rate. The issue of the recent US weather came up briefly in the Q&A where Yellen conceded that she was surprised at the payrolls slowdown in Dec-Jan. In terms of forward guidance, Yellen said that crossing policy thresholds would not prompt an automatic rate hike but would indicate whether it would be appropriate to consider whether the broader economic outlook justified a change in policy. She did state the Fed is “watching closely the recent volatility in global financial markets. Our sense is that at this stage these developments do not pose a substantial risk to the US economic outlook.”

Elsewhere on Capitol Hill, the House of Representatives managed to pass a bill late yesterday to suspend the debt limit until March next year. The bill was passed with a vote of 221 to 201 with 193 Democrats voting “yes”, versus just 28 Republicans who did the same. Despite the low GOP “yes” vote, Politico described a hardening realisation within the House and Senate GOP caucuses that “three years of partisan brinkmanship over the budget....fighting over the debt in a crisis-like atmosphere is a political loser”. The bill now goes to the Democrat-controlled Senate for approval where Harry Reid said the chamber will act to pass the measure as soon as possible.

Before we preview the day ahead, DB’s Gilles Moec and Mark Wall have published further commentary on the recent German Constitutional Court’s ruling on the OMT. In their view, the German Constitutional Court (GCC) (i) made it clear it regards OMT as exceeding the competences granted to the ECB by the European Treaty and that (ii) would not consider itself bound by a positive ruling of the European Court of Justice. Despite this the referral in their opinion does not have any immediate market consequences. However, Gilles and Mark think that it alters substantially the level of insurance we could expect from the ECB against any return of sovereign turmoil.