Yen Carry Tumbles, Dragging Equity Futures Lower As Asian Stimulus Hopes Fade

It took Virtu's idiot algos some time to process that the lack of BOJ stimulus is not bullish for more BOJ stimulus - something that has been priced in since October and which sent the USDJPY up from 97.000 to 105.000 in a few months, but it finally sank in when BOJ head Kuroda explicitly stated overnight that there is "no need to add stimulus now." That, and the disappointing news from China that the middle kingdom too has no plans for a major stimulus, as we reported last night, were the final straws that forced the USDJPY to lose the tractor-beamed 103.000 "fundamental level", tripping the countless sell stops just below it, and slid 50 pips lower as of this moment to overnight lows at the 102.500 level, in turn dragging US but mostly European equity futures with it, and the Dax was last seen tripping stops below 9400.

Overnight markets are fairly mixed with Japanese equities again under pressure (Nikkei -1.36%), as dollar-yen slips below 103. The BoJ kept its policy unchanged today, which was the first of its two meetings this month. The BoJ said that the Japanese economy has continued to recover moderately, albeit with some fluctuations due to the recent consumption tax hike. The BoJ also said exports have recently levelled off “more or less”. Chinese equities (Shanghai Comp +0.7%) have returned from their long weekend shrugging off the price action from the US over last couple of days. On the topic of China, DB’s Chinese banking analysts have published the results of a proprietary study on 2,400 Chinese corporate bond issuers and 13,000 collective trust products. Their analysis shows that 37% of the outstanding corporate bonds were held by the listed Chinese banks as of 2013, which also provided 36% of funds that financed the trust sector, implying listed bank asset at risks of potential default worth Rmb88bn. They believe the risks to the banks are more than covered by the Rmb819bn of excess provisions set aside.

Yesterday was another day where EM felt firmer than DM. Indeed the MSCI EM index (+0.21%) has now posted its 13th gain from the last 16 sessions, headlined by Brazil’s ibovespa which is up 16% during the same period. There were still pockets of volatility yesterday namely in Eastern Europe where relations between Russia and Ukraine appeared to have reached another low, affecting bond prices and FX in neighbouring sovereigns. Russian 5yr CDS widened 16bp to 225bp as tensions with Ukraine escalated. Pro-Russian protestors in the eastern Ukraine city of Donetsk called for a referendum before May 11th on the region’s status. There were similar independence claims made in Kharkhiv. The US said that there is evidence that pro-Russian separatists in eastern Ukraine are not locals. White House spokesperson Jay Carney said that “If Russia moves into eastern Ukraine, either overtly or covertly, this would be a very serious escalation”. (Bloomberg). Overnight, the Ukrainian government said that a regional government building in Kharkhiv had been cleared of separatist forces in an "anti-terror sweep". Central Kharkhiv has been closed while government operations are being carried out.

Looking at the day ahead, today sees the unofficial start of Q1 earnings season in the US as Alcoa cuts the ribbon. Markets are looking for Q1 EPS of 5.1c on revenues of $5.56bn. As always, management’s outlook statement and colour on industrial demand will be closely followed. The JOLTs jobs report, which is closely followed by the Fed Chair, will be released today. There’s not a lot of data in Europe outside of UK industrial production. The Bundesbank’s Weidmann speaks today at a German Banking Congress. Yesterday he was quoted as suggest his earlier comments on QE were misinterpreted. So today's words will give him a chance to perhaps set the record straight on his views.

Bulletin Headline Summary from Bloomberg and RanSquawk

Treasuries decline, led by shorter maturities, before week’s $64b auctions begin with $30b 3Y; notes to be sold today yield 0.91% in WI trading; stopout at that level would be highest since 0.913% in September.
The Bank of Japan refrained from adding to stimulus as Kuroda said the blow to the economy from last week’s sales-tax increase will fade during the summer; also said BOJ would adjust policy without hesitation as needed
Russia called on Ukraine to halt all military preparations in the east “immediately” or risk civil war as the U.S. accused Russia of instigating unrest that echoes the run-up to its annexation of Crimea
China’s stocks climbed, sending the benchmark index to a six-week high, on speculation the government will take further steps to bolster economic growth
A U.S. House committee will vote as soon as April 10 to hold a former IRS official Lois Lerner in contempt of Congress; Lerner was in charge of the office that gave extra scrutiny to some small-government groups seeking nonprofit status and has invoked her right against self-incrimination during both of her appearances before the committee
UnitedHealth Group Inc. and Humana Inc. are among the health insurers that will see their base U.S. government payment rate reduced 4% next year for Medicare Advantage programs for elderly Americans
Banks from Deutsche Bank AG to Barclays Plc attacked proposals to overhaul global capital rules for asset-backed debt, saying they risk choking securitization while clashing with efforts to boost lending to businesses
U.K. industrial production rose more than economists forecast in February, rising 0.9% vs median 0.3% est in Bloomberg survey
Sovereign yields higher. Asian stocks mixed, Nikkei falls 1.4%, Shanghai +1.9%. European equity markets, U.S. stock futures fall. WTI crude and gold higher, copper declines

US Event Calendar

7:30am: NFIB Small Business Optimism, March, est. 92.5 (prior 91.4)
10:00am: JOLTs Job Openings, Feb., est. 4.020m (prior
1:30pm: Fed’s Kocherlakota speaks in Rochester, Minn.
2:45pm: Fed’s Plosser speaks in Philadelphia
4:00pm: Fed holds open board meeting in Washington on leverage ratios
4:00pm: Fed’s Evans speaks in Washington Supply
11:00am POMO: Fed to purchase $750m-$1b TIPS in 2018-2044 sector

Asian Headlines

Asian markets (Nikkei 225 -1.4%) traded lower overnight as the cautious sentiment stemming from negative tone set by the Wall Street, which marked the biggest 3 day decline for the S&P 500 since January, dominated the price action. At the same time, while the BoJ kept its monetary policy stance unchanged as expected, the Bank made no reference to an expansion of the QQE, which resulted in broad based JPY strength and further buoyed demand for safehave assets.

EU & UK Headlines

Bunds failed to benefit from the absorption of supply as spec of QE by the ECB continues to undermine investor demand for core EU paper. At the same time, under performance by UK Gilts following the release of much better than expected UK Manufacturing and Industrial Production reports also weighed on prices.

- Supply from the Netherlands, Austria, Germany and the UK was successfully absorbed, though the belly continues to under perform amid concession related flow ahead of the 7y EFSF pricing and more supply on tap tomorrow.

US Headlines

Focus remains firmly on the upcoming earnings season, which Alcoa will officially kick off after the close on Wall Street today. In terms of macroeconomic news flow, US senate passed measure restoring emergency jobless benefits, while the Congressional Budget Office estimates a March budget deficit of USD 36bln vs. a deficit of USD 107bln in March 2013.

Equities

Stocks in Europe are seen lower across the board (Eurostoxx50 -0.48%), with consumer services sector under performing where Sports Direct trading sharply lower following share placement. At the same time, risk averse sentiment supported demand for more defensive sectors, with health-care benefiting as a result. Alcoa will kick off earnings season for Q1 after-market today, and although they have outperformed the S&P 500 this year with gains of approx. 20% YTD, earnings and revenue are expected to be lower than Q1 of 2013, and recent upside in reaction to the LME inventory destocking seen as unwarranted by many analysts. AA Weekly April 11th ATM 12.5 straddle implies a 5% price swing ahead of earnings

The release of better than expected UK Manufacturing and Industrial Production reports, which resulted in EUR/GBP trading sharply lower, failed to weigh on EUR/USD and continues to trade in positive territory amid a weaker USD, following BoJ inspired JPY strength overnight. As expected, GBP has outperformed EUR, with GBP/USD trading at its highest level since 13th March.

Commodities

WTI and Brent crude futures are seen higher, albeit off the best levels of the session, as concerns over more Crimea type referendums following protests in eastern cities of Ukraine raise fears of potential supply disruptions. Furthermore, Gazprom has said that Ukraine has failed to pay for its March gas on time. Looking ahead, later today participants will get to digest the API crude inventories (2135BST/1535CDT).

DB's Jim Reid summarizes the balance of the overnight events

In less than 13 trading hours the S&P 500 has gone from all time intra-day highs to now being down for the year again, falling -2.75% in the process and down - 1.08% yesterday. It’s been well documented that the slide has been led by the tech sector, but as we wrote yesterday high beta, high PE, growth and momentum stocks have all been hit hard in the sell off over the last two days. Indeed over the last 13 trading hours the NASDAQ (-3.88%) and S&P 500 biotech (-3.7%) indices have both underperformed the broader S&P 500.

Another way to look at recent performance is in terms of growth versus value stocks. The S&P 500 growth stock index, which has an average PE ratio of almost 20x, has underperformed both the broader S&P 500 and the S&P 500 Value index (PE ratio 14.7x) by 50bp and 95bp respectively in price terms over the last 13 trading hours. Looking at a longer time frame, the growth index (+4.6%) has also underperformed Value stocks (+7.4%) by 280bp in price terms since the year-to-date lows in early February. It’s early days but its inconsistent with perceived wisdom suggesting that cyclicals and growth stocks tend to outperform prior to the start of the Fed tightening cycle.

On a more micro level, perhaps slowing earnings growth is causing some of the growth and momentum stocks to de-rate. There is some evidence to suggest that expectations of earnings momentum amongst US firms have come back sharply in recent months. A near-record 93 companies in the S&P 500 have issued negative guidance while only 18 have offered positive guidance, according to the WSJ citing data from FactSet. That’s the second-highest number of profit warnings since 2006. The same data set suggests that earnings for the S&P 500 are forecast to decline 1.2% in the first quarter, which would mark the first year-over-year decline since the third quarter of 2012 (Wall Street Journal).

Alcoa kicks of Q1 earnings season tonight and our US equity strategist David Bianco has previewed it. He remarks that Q1 EPS estimates were cut sharply during the quarter. Over the last 3 years the average cut during the quarter was 3-4%, during 1Q it was 5.3%. 4Q12 (Sandy) and 4Q11 (brunt of the European recession and decline in market after US credit rating downgrade) had a similar cut. His main conclusions from the note are that given the sharp cuts in analyst estimates this quarter, 2/3rds of S&P companies should beat with an avg. EPS beat of 3% to 5%. These beats will prevent 1Q EPS growth from being flat y/y as current bottoms-up S&P EPS implies. However, final 1Q EPS growth will be weak at 4% with sales growth at 3%; thus the 8th qtr of anaemic sales growth. Most of 1Q's weakness is weather, but also a slower Asia, a still slow European recovery and soft operating conditions at most Financials haven't helped. David expects S&P sales and EPS growth to accelerate to its best pace since late 2011 by 2H14.

Looking at the day ahead, as we alluded to above, today sees the unofficial start of Q1 earnings season in the US as Alcoa cuts the ribbon. Markets are looking for Q1 EPS of 5.1c on revenues of $5.56bn. As always, management’s outlook statement and colour on industrial demand will be closely followed. The JOLTs jobs report, which is closely followed by the Fed Chair, will be released today. There’s not a lot of data in Europe outside of UK industrial production. The Bundesbank’s Weidmann speaks today at a German Banking Congress. Yesterday he was quoted as suggest his earlier comments on QE were misinterpreted. So today's words will give him a chance to perhaps set the record straight on his views.