Stocks Levitate Into US Open In Yet Another "Deja Vu All Over Again" Moment

With another session in which US futures levitate into the open, despite a modest drop in the Nikkei225 (to be expected after the president of Japan’s Government Pension Investment Fund, the world’s largest pension fund, said that a review of asset allocations into stocks is [40]not aimed at supporting domestic share prices [40]) and an unchanged Shanghai Composite while the currency pair du jour, the USDCNY, closes higher despite tumbling in early trade (which also was to be expected after a former adviser to the People’s Bank of China said China is headed for a “mini crisis” in its local- government debt [41]market as economic reforms lead to the first defaults) everyone is asking: will it be deja vu all over again, and after a solid ramp into 9:30 am, facilitated without doubt by the traditional Yen carry trade, will stocks roll over as first biotech and then all other bubble stocks are whacked? We will find out in just over two hours.

In terms of overnight news an events, it has been a quiet session so far with the exception of a statement by Buba President Jens Weidmann who told MNI that a discussion about effectiveness and side-effects of unconventional measures is needed. Specifically, Weidmann says: "This does not mean that a QE programme is generally out of the question. But we have to ensure that the prohibition of monetary financing is respected.... It should be clear that my personal assessment will be a strict one. Buying not just peripheral bonds but German and French ones as well does not automatically solve the problem of monetary financing... Of course any private or public assets that we might buy would have to meet certain quality standards. But the overall question is one of effectiveness, costs and side-effects. We are currently discussing the effectiveness of these measures. The intended effects would then have to be weighed against the costs and side-effects."

Germany open to QE? Who would have thunk it. Of course, it simply means that even Germany is now hurting due to the strong EUR, which is to be expected for the one nation that has the most to gain from a weaker euro (and thus, a very weak Deutsche Mark), and it also means that in addition to France, which has long been complaining about the strong European currency, now Germany too is joining in the axis against wanton Chinese purchases of Euros. We look forward to see how it will end.

The other notable news, of course, was S&P's downgrade of Brazil from BBB to BBB- a few short months ahead of the World Cup. This is what Goldman had to say about this unexpected event:

The downgrade materialized earlier than we expected and relatively quickly following S&Ps visit to Brazil a couple of weeks ago. Lack of convincing signals of a clear policy shift towards more conventional and orthodox policies likely convinced S&P that a downgrade was warranted sooner rather than later; the approaching June/July World Cup and ensuing campaign for the October presidential elections may have moved the needle towards earlier action.

In our assessment, the downgrade is well anchored in the clear deterioration of the macro fundamentals and visible erosion of policy credibility in recent years. As such, the move is not altogether totally surprising to the market. In that regard, although still a negative market development, the fact that S&P moved the rating outlook to Stable from Negative should allow the market to better digest the move (i.e., Brazil is not facing the immediate danger of losing the coveted investment grade status). But ultimately the onus is on the authorities to react to the loss of external creditworthiness by embracing a more disciplined and conventional management of the economy and rebalance the economy. Failure to do so is likely to further depress market sentiment and asset prices

Turning to the day ahead, the focus turns to the data and a couple of Fed speakers. The European docket is headlined by the German IFO and UK inflation. A number of US housing market updates will be released today including January Case-Shiller and FHFA house prices and new home sales for February. Match consumer confidence is also an important data point. In terms of Fed speakers, Lockhart (non-voter, dove) and Plosser (voter, hawk) will be speaking today.

Bulletin News Summary from RanSquawk and Bloomberg

EUR has underperformed its peers this morning after ECB's Weidmann said that interest rates are still appropriate and that negative rates could counter impact of strong EUR.
Positive corporate news flow pre-market ensured that the release of less than impressive German IFO survey failed to dent investor appetite for risk.
UK inflation rate fell to a to fresh four-year low of 1.7%, pushed lower by falling petrol prices.
Treasuries steady, long yield curve spreads holding at multi-month lows before week’s $109b auctions begin with $32b 2Y; yield 0.475% in WI trading. Stopout yield at that level would be highest since May 2011.
China is headed for a “mini crisis” in its local- government debt market as economic reforms lead to the first defaults, according to a former adviser to the People’s Bank of China
U.K. consumer prices rose an annual 1.7% in February, the least since October 2009, compared with 1.9% in January
Bundesbank president Jens Weidmann said that a QE program is not “generally out of the question,” discussion is needed on effectiveness and side-effects; said negative rates could counter impact of strong euro
German business confidence as measured by the Ifo institute fell to 110.7 in March, the first decline in five months as companies weighed risks to trade from EU sanctions vs Russia
The Crimean crisis is poised to reshape the politics of oil by accelerating Russia’s drive to send more barrels to China, leaving Europe with pricier imports and boosting U.S. dependence on fuel from the Middle East
The NSA’s bulk collection of phone records, e-mail and Internet data would end under legislation to be unveiled today by the top Republican and Democrat on the House intelligence committee, according to a congressional aide
If Obamacare unravels, it could be for want of reference in the 2,409-page statute to a section of the act that directs the Federal government to establish an insurance marketplace in states that decline to create exchanges
Sovereign yields decline. Asian equities mostly lower. European equity markets, U.S. stock-index futures higher. WTI crude, gold and copper higher

US Event Calendar

9:00am: S&P/Case Shiller Home Price Report; 20 City m/m, Jan., est. 0.60% (prior 0.76%); 20 City y/y, Jan., est. 13.34% (prior 13.42%); Index, Jan., est. 165.73 (prior 165.69)
10:00am: Consumer Confidence Index, March, est. 78.5 (prior 78.1)
10:00am: Richmond Fed Manufacturing Index, March, est. 4 (prior -6)
10:00am: New Home Sales, Feb., est. 445k (prior 468k); New Home Sales m/m, Feb., est. -4.9% (prior 9.6%) Central Banks
12:00pm: ECB’s Draghi speaks in Paris
4:00pm: Fed’s Lockhart speaks in Atlanta
7:00pm: Fed’s Plosser speaks in New York
1:00pm: U.S. to sell $32b 2Y notes
11:00am: POMO Fed to purchase $1b-$1.25b in 2036-2044 sector

Asian Headlines

Quiet session overnight in Asia and Japanese accounts remained on the sidelines ahead of the fiscal year end, with JGBs settling little changed at the close. Elsewhere, the CNY was supported after the PBoC strengthened the CNY reference rate for a 2nd consecutive session, while the rest of the major pairs saw relatively subdued trade amid a lack of tier one data overnight.

EU & UK Headlines

The release of less than impressive German IFO survey failed to dent investor appetite for risk, as the price action remained supported by positive corporate news pre-market which in turn ensured that stocks were bid since the get-go. Nevertheless, dovish comments by ECB's Weidmann who said that interest rates are still appropriate and that negative rates could counter impact of strong EUR, together with month-end demand meant that Buds also remained better bid.

- German IFO Business Climate (Mar) M/M 110.7 vs. Exp. 110.9 (Prev. 111.3)

Elsewhere, UK inflation rate fell to a to fresh four-year low of 1.7%, pushed lower by falling petrol prices. The ONS also said the price of clothing and footwear had also increased at a slower pace than the same period last year, and energy bills also had a downward effect on inflation.

- UK CPI (Feb) Y/Y 1.7% vs. Exp 1.7% (Prev. 1.9%)
- UK RPI (Feb) Y/Y 2.7% vs. Exp. 2.6% (Prev. 2.8%)

Barclays preliminary pan-Euro agg month-end extensions: (+0.07y) (12m avg. +0.08y)
Barclays preliminary Sterling month-end extensions:(-0.02y) (12m avg. +0.06y)

US Headlines

There was little in terms of US related news flow but Fed's Plosser said that he doesn't think the Fed changed its position on rate rise.

Barclays preliminary US Tsys month-end extensions:(+0.07y) (12m avg. +0.08y)

Equities

Heading into the North American open stocks in Europe are seen broadly higher, with all ten sectors in the green and UK listed Kingfisher (+6.6%), as well as easyJet (+4.6%) outperforming following earnings pre-market. Sector wise, the move higher was led by basic materials sectors, with AUD/USD trading at its highest level since mid-December and above the 200DMA and supporting precious metal prices.

Despite an inline with exp. UK CPI release, higher than exp. RPI data ensured that GBP has outperformed EUR, with EUR/USD moving below the 21DMA line as a result. At the same time, USD/JPY failed to benefit from the risk on sentiment, as better bid USTs and lower EUR/JPY offset JPY weakness elsewhere.

Commodities

Energy complex was supported by further rhetoric surrounding the recent annexation of Crimea by Russia, with reports that G7 energy ministers are said to consider Russia energy sanctions and G7 officials said to discuss sanctions on Russian economy. However, the IEA said that Russia is to remain the biggest gas supplier to Europe for decades, adding that shale gas wont change Europe's dependence on imports.

The full overnight summary from DB's Jim Reid

With a few days left in Q1, this year continues to feel like one where its one step forward and then one step back with little momentum building. Credit still feels in good technical shape and is out-performing but equities do seem to be experiencing fatigue now that it’s clearer that the Fed is sticking to its tapering guns and also raising the prospect of rate rises in H1 next year. Outside of the strong peripheral equities markets, the US market is one of the few that's mostly managed to keep in positive territory YTD. However even the S&P 500 yesterday went down through the flat line for the year again before recovering from the lows to finish -0.49% (+0.49% YTD). A weather related data rebound will likely help confidence to some degree over the next few weeks but as each FOMC meeting takes away another slice of liquidity it’s easy to see how this long bull market is running on lower fuel now.

Outside of Fed concerns, we can't seem to shrug Geopolitical risk either as Ukraine continues to lurk in the background. Indeed yesterday saw a number of world leaders pledge further sanctions against Russia including potential injunctions against the Russian energy industry. The G8 meeting in Sochi was also cancelled, and instead the G7 summer meeting (excluding Russia) will be held in Brussels. In terms of the economic fallout from sanctions, Reuters reports that the Russian government has estimated that Q1’s capital outflows are likely to be at the top end of $65-70bn government estimates. That would exceed the $63bn of outflows seen in the whole of 2013 and higher than the $50bn estimates by Putin’s economic adviser 10 days ago. There were also reports that the conflict could widen to neighbouring Moldova, a former Soviet State (Washington Post). The WaPo writes that the Russian-speaking enclave of Transnistria, situated between south-eastern Ukraine border and the state of Moldova could be targeted by Russia. That would require Russian troops to cross over Ukrainian territory potentially further inflaming tensions there. Palladium prices continued to climb yesterday to multi-year highs, partly due to concerns that Russian supply may be disrupted by sanctions.

Making headlines elsewhere in EM was Brazil, after S&P announced its much awaited downgrade of the sovereign to BBB- from BBB shortly after the US market close yesterday. S&P first put Brazil’s rating on negative outlook in June last year citing slow GDP growth and a weakening fiscal position. These factors have arguably worsened since June last year so it’s fair to say that yesterday’s downgrade doesn’t come as a huge surprise for markets. Nonetheless, it will be interesting to see how the Brazilian Real and credit trade today. Our EM strategists think that Brazil’s CDS will likely face some moderate pressure again in the coming days, as this downgrade may have come earlier than many expected. However any widening should be moderate as the risk has largely been priced in, in their view. For the record, other EM sovereigns with negative rating outlooks at S&P include Hungary, Ukraine, Russia, Turkey, Mongolia & India.

Turning briefly to overnight markets, Japanese and Chinese equities have shrugged off the weaker close on Wall Street to trade marginally firmer today The Nikkei recovered from a weaker start to trade at +0.1% as we type. Before the Japanese open, the president of Japan’s Government Pension Investment Fund, the world’s largest pension fund, said that a review of asset allocations into stocks is not aimed at supporting domestic share prices (Asahi news). The Shanghai Composite (+0.2%) is supported by news of reforms to industries currently dominated by state-owned enterprises and continued expectations of stimulus from the government amid weakening growth data. This is also supporting AUDUSD (+0.05%) to some extent. The Shanghai Composite is currently languishing at record lows in terms of valuations – the index is currently trading at a Price-Earnings ratio of 10x, compared to the S&P500 at 17x according to Bloomberg data. Staying with China, both the CNH and CNY are poised to appreciate against the USD for the second straight day today, after recording their largest one day gains against the USD in two years yesterday.

On the topic of economic growth, the latest round of global flash PMIs for March turned out to be fairly disappointing with the big three PMIs in China, US & Euroarea all falling short of consensus expectations and slowing from the February readings. We wrote about the weak Chinese flash HSBC PMI yesterday (48.1 vs 48.5 previous) which left our Chinese economist Lin Li warning that Q1 GDP growth could be significantly lower than in Q4 and likely coming in toward the lower end of the governments comfort zone of 7-8%. The US manufacturing PMI (55.5 vs 56.5 expected) also disappointed relative to both consensus and last month’s reading (57.1). The only bright spot was the Euroarea PMIs, but even here the flash composite PMI fell by 0.1 points to 53.2. The weaker print was driven by a disappointing German manufacturing reading (53.8 vs 54.5 expected) offset by France (51.9 vs 49.7). On a positive note, France’s composite PMI (51.6) rose back above 50.0 for the first time in six months.

Looking at some of the other headlines over the last 24 hours, there was an interview published by the Washington Post with San Francisco Fed President and key Yellen ally, John Williams that we think is worth reading. In the interview, when asked about Yellen’s “six months” comment, Mr Williams said that the FOMC statement was not specific about a time frame for first rate hikes after ending asset purchases.

Williams said that his view is that QE will end later this year, before interest rates start rising in the second half of 2015 – slightly later than had been implied by Yellen at her press conference last week. Williams also seems to downplay the shift in interest rate expectations at the Fed saying that it was partly a natural response to lower unemployment.