Treasury Yields Tumble In Europe, US On ECB QE Disappointment

Overnight Europe got two mini lessons: i) that rumors spread by conflicted French banks about "imminent" ECB QE don't always, if ever, come true, after the ECB spent a decent portion of the overnight session explaining, via Reuters, that while the central bank would engage in "some stimulus for the euro zone economy but falls short of the large-scale effect the ECB could unleash with a major program of quantitative easing (QE) - money printing to buy assets. Such a QE plan is still some way off." Precisely as we warned [25]. The other lesson is that when QE or even hopes of QE fade, bonds get bid due to rotation out of equities into "safe haven" assets. As a result, German Bund yields tumbled with stops taken out (and Goldman stopped out on their Bund short) through the 12 month lows of 1.4% with 10 Year yields following lower and dropping to 2.565% hours ago, or a level not seen since November 1.

Overnight equity markets are having a mixed session as investors digest a number of headlines coming from China. Following yesterday’s disappointment over China’s industrial production and retail sales numbers, a number of forecasters have been highlighting the downside to Q2 and 2H2014 growth numbers. On that note, newswires are reporting that the PBOC has told 15 Chinese banks to accelerate the approval of mortgages as reports continue to stream out about property price drops and distressed property developers in China (Bloomberg). There are also continued reports of some cities relaxing buying restrictions. This is helping Chinese property stocks (+0.4%) today. Banks are lagging after the Bank of China said it will be raising US$16bn in preferred stock in domestic markets in an effort to strengthen its balance sheet. This comes after a similar announcement from Agricultural bank of China last week. Asian EM fixed income is performing well today across rates and credit, taking its lead from the strong performance of global EM yesterday. The Asia IG index is trading 4bp tighter this morning.

So while equities continue to exist in a broken, detached universe all of their own, the bond market continues to scream ever louder that something is very wrong with the artificial universe created by financial experts and pundits.

Looking at the day ahead, the focus will be on the UK with the employment report in the morning, followed by the BoE’s inflation report later in the day. Ahead of that German, Spanish and French CPI data will be released (shortly after we go to print) and the ECB’s Weidmann and Mersch will be speaking at the Welt Monetary Conference in Berlin. Olli Rehn also speaks at the conference. US PPI is the main data point Stateside so plenty of inflation data around today.

Bulletin headline summary from RanSquawk and Bloomberg

ECB sources, Praet and Mersch continued to support market expectations of policy easing in June, resulting in Bund futures printing fresh contract high, however lack of commitment for an introduction of QE in June meant that stocks failed to benefit from this
BoE's Carney reiterated the need to reduce spare capacity before raising rates prompted markets to re-price expectations of a first rate hike to March 2015, from February 2015 prior to the announcement
Treasuries gain for a second day, 10Y yield falls to lowest since Nov. 1; USTs following bunds (yields lowest in a year) as ECB’s Mersch says ECB can buy bonds on secondary market if needed.
ECB’s chief economist Praet said in interview with Die Zeit that central bank preparing “broad range of measures,” including more long-term loans to banks, negative interest rates
A June rate cut is “more or less a done deal,” a source told Reuters
Mark Carney signaled Bank of England officials are prepared to wait until next year to raise interest rates as he acknowledged that the British economy is moving closer to the point of needing tighter policy
Ukraine urged Russia to condemn separatists in its eastern regions after seven government troops died in an ambush in a signal that the ex-Soviet republic may be sliding closer to outright civil war
Some investors between 1997 and 2013 may have gotten early word of changes to Fed policy and profited by trading before the Fed publicly announced the policy shifts, according to Singapore-based researchers
Wall Street’s bonus pool may rise as much as 10% this year for asset managers while fixed-income traders could see a 15% cut, according to compensation consultant Johnson Associates Inc
Ex-U.S. Treasury Secretary Timothy Geithner must comply with S&P’s demand that he provide documents related to its claim the U.S. sued the company in retaliation for downgrading government debt
A Kentucky official identified herself as Twitter’s “Bond Girl,” an anonymous tart-tongued commenter on municipal- bond matters with more than 8,400 followers
Sovereign yields slide. Nikkei -0.14%, Shanghai -0.1%. European equity markets, U.S. stock futures fall. WTI crude, gold and copper higher

US Event Calendar:

7:00am: MBA Mortgage Applications, May 9 (prior 5.3%)
8:30am: Producer Price Index, April, est. 0.2% (prior 0.5%)
PPI Ex Food and Energy, April, est. 0.2% (prior 0.6%)
PPI y/y, April, est. 1.7% (prior 1.4%)
PPI Ex Food and Energy y/y, April, est. 1.4% (prior 1.4%)
11:00am POMO: Fed to purchase $350m-$600m in 2024-2031 sector

EU & UK Headlines

Expectation of further policy easing by the ECB remained rife this morning as ECB sources, Mersch and Praet outlined potential policy measures the ECB could turn to in June, pointing to rate cuts, further LTRO operations and even ABS purchases. However, failure to reinforce growing expectation of an introduction of QE in June meant that unlike previous session, this failed to benefit stocks. Nevertheless, the upside by Bunds saw yield drop to its lowest levels in 12-months and below 1.4% level, while the US 10 year yield broke 2.6% level, lowest since November 2013.

Consequent spill over effect saw Gilts grind higher this morning, benefiting from the less than impressive jobs report which showed lacklustre wage growth and also comments by Carney who presented the latest Quarterly Inflation Report. The Bank sought to downplay heightened expectations of a rate hike and reiterated that there is plenty of spare capacity which needs to be closed before raising bank rate. As a result, following the opening remarks, markets were pricing in an interest rate hike in March 2015 (before the QIR markets were pricing in a hike in Feb 2015) and the second hike in July 2015 (from June 2015).

Equities

Heading into the North American open, stocks in Europe (Eurostoxx 50, -0.25%) are seen broadly lower, with the more defensive sectors such as health-care outperforming, as comments by ECB's Mersch, Praet and ECB sources prompted market participants to scale back expectations of ECB introducing asset purchase programme as early as June. In terms of US earnings today, focus will be on Deere & Co, Macy's Inc and Cisco Systems.

A flight to quality and unfavourable interest rate differential related flows saw USD/JPY break below the 102.00 handle this morning, in turn filtering through into the Nikkei 225 futures which traded lower by as much as 1%. Looking elsewhere, somewhat disappointing UK jobs report and attempts by Carney, who presented the QIR, to downplay the need to raise interest rates resulted in GBP under performing its peers this morning, which also enabled EUR/GBP to pull back from yesterday's multi-month lows.

Commodities

Lingering uncertainty surrounding the stand-off in Ukraine continued to provide support to metals this morning, with spot gold (+ USD 7.5) taking out stops through its 200DMA at USD 1299.01 and the USD 1300.00 handle on its way to session highs. At the same time, spot palladium prices advanced to its higher since August 2011, underlying fears of supply disruptions.

In terms of energy prices, WTI and Brent crude futures have pull off the best levels but remain higher, supported by tensions in Ukraine and also fall in supplies at the Cushing hub as indicated by the API inventory report yesterday.

US API Crude Oil Inventories (May 09) W/W 912k vs. Prev. -1820k

- Cushing Crude Inventories (May 09) W/W -590k vs. Prev. -1460k
- Gasoline Inventories (May 09) W/W -2,020k vs. Prev. 2450k
- Distillate Inventories (May 09) W/W 883k vs. Prev. 763k

Jim Reid's overnight recap completes the daily summary

Today sees the release of final inflation numbers in Germany, France and Spain, ahead of the final Euroarea inflation numbers on Thursday. This report takes on additional significance with the recent comments from Draghi suggesting that the Governing council may be “comfortable with acting in June” conditional on how the ECB’s staff growth and inflation projections pan out. Yesterday's story from the WSJ that the Bundesbank is willing to support aggressive ECB easing policies including rates cuts and targeted asset purchases added further fuel to the ECB easing debate. The article was published around 11am London time and was enough to cause a drop in EUR from 1.375 to a low of 1.369. The disappointment of the German ZEW survey (expectations index 33.1 vs consensus 40.0) added more weight to the selloff.

This follows on from yesterday where we saw another day of strength in equities and government bonds on a day of soft economic data in the US, Europe and China. While bunds, core and periphery rates were well bid following the WSJ’s Bundesbank article, US 10yr treasury yields took a step lower following the disappointing US advance retail sales print. Headline retail sales (+0.1% MoM vs 0.4% expected) were substantially below consensus estimates, as were the underlying ex auto (0% vs +0.6% expected) and ex auto/gas readings (-0.1% vs 0.5% expected). This was partially offset by upward revisions to prior months’ numbers but overall there was disappointment about the lack of momentum seen. The US 10yr yield rallied 5bp, led by strengthening in the long end of the curve and the dollar fell against a number of currencies outside of the Euro.

With the S&P500 (+0.04%) briefly breaking the 1900 level for the first time intraday on Tuesday, and the MSCI EM index (+0.65%) rising for the 7th time in the last nine sessions and the FTSE also at 14yr highs, it’s interesting to see the FT saying that investors’ holdings of cash are at their highest levels in nearly two years. The article says that average cash levels have reached 5% of global fund portfolios, which is the highest level since June 2012 and up from 4.8% in April. News of light risk positioning might be taken as good news for the bulls, but not so much for those who are already underweight risk. Speaking of cash reserves, Bloomberg highlights that the 12 developing nations with the largest FX reserves outside of China added $34bn in reserves in the last three months, lifting their combined holdings to $2.98 trillion on April 30th. This is the largest since Bloomberg began compiling data in 2008. Amongst the countries who had added the most was India who has taken advantage of the recent Rupee strength to add to reserves while tempering currency gains.