The tidal patterns of this market have become so well-known to even the least observant [25]: push the USDJPY (or other JPY carry pairs) higher starting around 6am Eastern, then ramp it just before US open to launch cross-asset momentum ignition algos in FX which then carry over to spoos and the broader "market." In the meantime, overnight selling of USDJPY allows a reset before ensuing buying during the US daytime session. Rinse. Repeat. Sure enough, just after 6 pm Eastern, the same USDJPY which catalyzed yet another all time high close had been sold off, leading to a 0.85% drop in the Nikkei and US equity futures which are showing an unprecedented ungreen color. Don't worry though: the pattern is too well-known and practiced by now, and we fully expect USDJPY levitation to pick up shortly, which is the only signal ES-algos need, trampling over any kind of newsflow both good and bad, and leading to yet another all time record high which it goes without saying is completely detached from any underlying reality at this point and at any time over the past 5 years.
Elsewhere in Asia, the Shanghai Composite rose 1.1% because while CPI rose more than expected overnight, printing at 2.5%, higher than the 2.4% expected, and up from 1.8%, meaning there is less room for the always hopeful that the PBOC will launch some massive stimulus, however the "good" news was that PPI also printed a little better than the -1.5% expected, for the smallest decline in 5 months. Still, having declined for 27 months in a row, one will be hard-pressed to spin this data as positive for China's "good" inflation. However, the bigger issue was that as the PBOC announced yesterday, it would do a targeted RRR cut, far smaller in scope than most had hoped, one which according to BofA would release a paltry RMB50 billion into the system and merely seek to avoid a lock up of the interbank funding market that happened this time last year.
Stocks in Europe remain mixed, despite the recent uptick by the DAX index which saw the index print fresh record highs, with gains led higher by more defensive sectors such as health care, as credit spreads remain marginally wider on the session. In stock specific news, BG Group (-1%) are putting the FTSE 100 under pressure after being cut from neutral top underperform at Exane, with the UK index the underperformer. Novartis shares are one the best performing healthcare stocks after the Co. were raised to equalweight vs underweight at Barclays.
Looking at the day ahead, the post ECB and payrolls lull continues today with little on the European data calendar except for French and Italian industrial production updates. The EU’s Barroso and Rehn will be speaking today at the Brussels Economic Forum. JOLTs job openings and wholesale inventories are the main focus on the US data docket.
ASIAN HEADLINES
Chinese equities outperformed (Hang Seng Index +0.86%, Shanghai Composite +1.08%) their Japanese counterparts overnight amid an uptick in the May CPI (Y/Y 2.5% vs. Exp. 2.4%, 4-month high) and a smaller than exp. decline in the May PPI (Y/Y -1.4% vs. Exp. -1.5%, smallest decline in 5 months; 27th month of decline), signalling a higher rate of demand in the country than previously estimated. Nonetheless, the stronger JPY overnight weighed on exporting stocks, as the USD/JPY rate fell below the 100DMA. As such, the Nikkei 225 closed with losses of 0.85%.
FIXED INCOME
Today’s session has seen a halt in the sharp post-ECB peripheral rally, with Spanish and Italian yields wider against the German benchmark as traders book profits from the ECB inspired gains. This followed a higher opening in bunds which stemmed from stronger JGBs and Treasuries overnight, however fell back to flat on the day as markets absorbed supply from the Netherlands, UK and Germany.
EQUITIES
Stocks in Europe remain mixed, despite the recent uptick by the DAX index which saw the index print fresh record highs, with gains led higher by more defensive sectors such as health care, as credit spreads remain marginally wider on the session. In stock specific news, BG Group (-1%) are putting the FTSE 100 under pressure after being cut from neutral top underperform at Exane, with the UK index the underperformer. Novartis shares are one the best performing healthcare stocks after the Co. were raised to equalweight vs underweight at Barclays.
FX
In FX, EUR once again underperforms, with heavy cross selling in EUR/GBP (testing post-ECB lows of 0.8065) and EUR/JPY (approaching last week’s lows at 138.69 and 200DMA at 138.68) allied with large sell-stops taken out on the way through yesterday’s low weighing on the single currency further. GBP has been buoyed by better than expected industrial and manufacturing figures, which showed output growing at the fastest rate since early 2011, despite electricity and gas demand slumping due to better April weather. Elsewhere, emerging market FX underperforms after a series of warnings issued by the South African central bank governor, who sees concerns over Q2 growth, stating that the era of abundant flows to emerging markets is over, pushing the ZAR to erase the past three session’s gains.
COMMODITIES
In the metals complex, Platinum prices continue to outperform precious metals counterparts as market participants react to the failure to end a 5-month long strike by South Africa’s mining sector which collapsed yesterday. However, the mining minister this morning stated that all parties agreed on a ZAR 12,500 demand but the sticking point is on how long it would take to achieve. In sympathy, palladium prices are also bid this morning, trading at the highest level since August 2011. Meanwhile, in energy markets, WTI crude futures continue to pull off their highs given the sharp gains seen yesterday, with participants now looking ahead to the API inventories report after-market and tomorrows OPEC meeting, the first one since December.
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DB's Jim Reid concludes the overnight recap
China is the main focus overnight following yesterday’s targeted reserve requirement ratio cut from the PBoC and after the country’s May inflation data was released earlier this morning. 12-month yuan forwards continue to strengthen today (+0.10%, following +0.5% yesterday) and are poised for the strongest three-day session since January 2012 according to Bloomberg data. This comes after the better than expected trade surplus data over the weekend and after the Chinese central bank announced yesterday that it will cut RRRs by 50bp for a number of regional and agricultural banks. The cut applies to two-thirds of city commercial banks, 80% of non-county level rural commercial banks and 90% of non-county level rural cooperative banks. DB’s Chinese bank analysts are relatively sanguine on the policy announcement, estimating that this would inject at most RMB100bn of liquidity to the financial system, with the city and rural commercial banks as primary beneficiaries. In contrast to a universal RRR cut which would release Rmb540bn of liquidity, the impact of this round of targeted RRR cut appears to be relatively limited in their view. Nevertheless, newswires are reporting today that the Chinese government may indeed have to consider a more significant universal RRR cut if economic growth falls below 7% or forex purchases drop significantly, citing an unidentified National Development and Reform Commission official (Bloomberg). Nevertheless this is boosting the Shanghai Comp (+0.5%) and HSCEI (+0.5%) which have both notched decent gains today led by consumer and cyclical stocks.
In terms of the inflation data both the CPI and PPI readings came in at relatively benign levels. CPI accelerated to a rate of 2.5% y/y (vs 2.4% expected and 1.8% previous), its fastest pace in 4 months on the back of higher food prices. Ex-food CPI was 1.7% y/y. Producer prices notched up its 27th consecutive negative monthly reading (-1.4% vs -1.5% expected) but it was higher than the -2.0% reading from the previous month. Elsewhere in China, iron ore (-0.9%) and copper (-0.5%) futures traded domestically are once again down today amid headlines suggesting investigations into metal inventory fraud have spread to a second Chinese port (WSJ). The WSJ also suggests that some foreign banks are conducting investigations into reports that commodity inventories sitting at ports have been pledged to banks multiple times and these banks are holding off on new financing deals in the mean time. COMEX copper has posted losses for 6 consecutive days partly due to these concerns.
In a relatively quiet day yesterday, a few things came to our attention including some interesting comments from the St Louis Fed President James Bullard. Bullard, who is seen as a bit of an FOMC bellwether, appears to be gradually shifting to a more hawkish stance, saying yesterday that the FOMC is now
much closer to its macroeconomic goals than it has been in the past five years. Indeed, Bullard went on to say that since 1960, 75% of the time the FOMC was in a worse position with respect to its goals than it is today. In terms of the Fed’s policy stance, the St Louis Fed president commented that if the economy continues to improve, the Fed may change the conversation about monetary policy in the fall of this year and there will be more sentiment toward an earlier rate hike. On this note, Bullard reiterated his forecast for rate hikes in the first quarter of 2015 and noted that he was a bit puzzled as to why others were forecasting the first rate hike to come in the second half of next year. It’s certainly a shift from his tone last year which included his dovish dissent at the June FOMC last year when he said that “Committee should have more strongly signalled its willingness to defend its inflation target of 2% in light of recent low inflation readings”.
For the time being, the broader markets are swimming joyfully in central bank liquidity, with a major beneficiary being European credit. Yesterday we noted that the iTraxx Financials Senior index has been further closing the gap with iTraxx Main since the ECB’s announcement last Friday. Well that trend continued yesterday and the basis between the two credit indices closed at just 1.25bp with credit investors getting more and more comfortable that European financials are becoming safer with regulation and the extreme levels of ECB liquidity. Yesterday we published the graph showing that Sen Fins haven't traded inside Main since January 2010. Other landmark levels were reached in the credit space yesterday with iTraxx Main closing tighter than the benchmark CDX US IG index for the first time since August 2010. Since the middle of 2010, iTraxx Main has traded on average 24bp wider than its US counterpart partly as the effects of the Euroarea sovereign debt crisis took its toll on European credit. The gap between Main and US IG was as wide as 60bp shortly before Draghi’s July 2012 “whatever it takes to preserve the euro” speech.
Outside of credit, EURUSD suffered a short sharp reversal of its brief post-ECB spike on Thursday, taking the fx cross to lower levels than those seen immediately before the ECB meeting last week. The EURUSD is roughly unchanged overnight but it broke below 1.360 and its 200 day moving average yesterday. We’re left wondering if the sharp rally in European rates over the last few days has begun to weigh on the Euro, especially with the widening rate differential versus the US. Yesterday’s outperformance of the European periphery has taken Spanish and Italian 5yr bonds to 48bp and 38bp lower than the US 5yr yield respectively. In equities, the S&P500 managed to grind out a small gain of +0.09%, paced by gains in small caps and growth stocks. Indeed, the small-cap heavy Russell 2000 managed to outperform other indices (+0.92%) and its now only a few percentage points away from its record high posted in March before we had the selloff in growth and cyclical stocks that occurred towards the end of Q1/start of Q2.
Looking at the day ahead, the post ECB and payrolls lull continues today with little on the European data calendar except for French and Italian industrial production updates. The EU’s Barroso and Rehn will be speaking today at the Brussels Economic Forum. JOLTs job openings and wholesale inventories are the main focus on the US data docket.