Futures Fade Entire Overnight Rally

And the overnight futures ramp started off so promising.

Now that Abenomics has officially failed (because even Goldman is providing reasons why it didn't work [43]), and Abe is being deserted by his ministers left and right [44], and not just any ministers but women - the same gender [45]which he has been swearing recently he will do everything in his power to get better employment positions - the Nikkei news service disseminated yet another (no really) blurb about the only leverage Japan has, namely that the $1.2 trillion pension fund will boost its stock allocations from 12% to 25%. Putting this in context it means, that instead of holding $144 billion, the GPIF would own $300 billion, or... just about 3 months worth of Japanese POMO!

Alas, the Mrs Watanabe Kamikaze pilots are unable to do simple math and inversely plunged headfirst into headline, sending the TOPIX +4% overnight, just days after it re-entered bear market territory, because there clearly is nothing like "price stability" of an entire nation's equity index trading like a pennystock on steroids. The headline pushed the USDJPY higher by about 70 pips from the Friday close to just under 107.5, and US equity futures up to just about 1900, before more somber and rational voices took over and picked up on Rosengren's comment [46]from last night that QE3 is ending, absent some dramatic change (like a 5% "plunge" in stocks?), and the USDJPY was back under 107 at last check, with futures back in freefall mode.

For whatever reason, futures have faded the entire move higher, and the huge IBM earnings miss which was announced moments ago will hardly help with the tone today. In fact, the only thing that may be helpful is for Rosengren to do a DieselBOOM and retract.

Overnight, the Nikkei 225 (+3.98%) posted its biggest 1-day gain in over a year, and back above the key 15000 level, exiting correction territory. The index underpinned by reports that the GPIF is working out plans to increase its portfolio allocation to domestic stocks to around 25% from 12%. However, despite a gap higher in European stock futures at the open, the domestic news in Japan failed to feed through and once cash equity trade resumed downward pressure soon was felt from heavyweights SAP (-4.2%) and Philips (-3.9%), both of which issued disappointing earnings reports. The FTSE MIB has outperformed its peers following confirmation this morning that the ECB has started its purchases of covered bonds.

Looking to the day ahead, we have German September PPI (expected at 0% MoM) and Italian August industrial orders and sales (with the former expected in at +0.2% MoM). On top of these data reads, the ECB's Coeure is speaking today in London whilst the EU and Japan are holding trade talks in Brussels. We will also have earnings from SAP, Apple and IBM today as Q3 earnings season presses on.

Bulletin Headline Summary from Bloomberg and RanSquawk:

Nikkei 225, finishes up 3.98%, supported by comments that the GPIF is working out plans to increase its portfolio allocation to domestic stocks to around 25% from 12%
Focus on disappointing earnings updates from heavy weights SAP, Philips & IBM who are seen down 6% in pre-market
Looking ahead direction will likely be dictated by the performance of Wall Street with a lack of scheduled macro events, Apple due to report after-market
Treasuries decline, 10Y yields 2.21% after last week’s rally that saw yield slide as much as as much as 33.5bps to 1.862%, lowest since May 2013.
Last week’s market gyrations sparked questions about whether bank regulations implemented after the 2008 financial crisis exacerbated price declines by limiting the ability of Wall Street banks to make markets
ECB bought short-dated French covered bonds today, according to three people familiar with the matter, who asked not to be identified because they’re not authorized to speak about it
The ECB’s unprecedented inspection of lenders’ books will help end a slump in lending that’s dogged southern Europe for years, said executives at some of the region’s largest banks
France’s finance and economy ministers fly to Berlin today to try to convince their German counterparts of their plans to improve competitiveness and to press for more investment
Fed policy makers are missing a key element as they assess the health of the labor market: data that includes whether those who are employed are overqualified for their job or would like to work more hours
Russia’s foreign minister said his country will refuse to accept conditions to end sanctions after talks in Italy failed to produce a breakthrough over the truce in Ukraine’s conflict-ridden east
Protest leaders will meet government officials tomorrow for talks to end more than three weeks of pro-democracy demonstrations, as Hong Kong’s top official blamed foreigners for adding to the foment
Obama put aside closed-door fundraisers for a few hours and stepped onto the stages at rallies for allies running for governor in Illinois and Maryland, two heavily Democratic states
Sovereign yields mixed, EU peripheral yields decline. Asian stocks surge. European stocks fall, U.S. equity-index futures higher. Brent crude lower, gold and copper gain

US Event Calendar:

None scheduled
Just 4 POMOs to go: 11:00am: Fed to purchase $1b-$1.25b notes in 2019-2020 sector

FIXED INCOME

Bund futures are seen higher into the North American cross over supported by weakness in European stocks after several disappointing earnings pre-market. However, trade has lacked conviction given the lack of scheduled calendar events today resulting in modest volumes (260k). In terms of fundamental news, the ECB has said it has started its purchases of covered bonds, this being confirmation of its previously announced programme, but has helped benefit the peripheral markets with spreads coming off their widest levels.

In terms of US headlines from the weekend:

Fed expected to maintain its steady-stance approach, according to Hilsenrath. (WSJ)

Fed's Rosengren (non-voter, Dove) said he is open to adjustment to the overnight Repo facility as Fed approaches rate rise and can easily imagine conditions in which Fed would keep rates near zero until 2016. Rosengren also added that uncertainty could shift lift-off by 6 months. (RTRS) Fed's Williams (non-voter, Dove) said his baseline forecast implies ending current asset-purchase program this month and rate increases in FFR target range starting sometime next year around mid-2015. (WSJ)

EQUITIES

FX markets have been relatively quiet as the market continues to take a breath from the high degree of volatility observed last week. GBP/USD has seen some slight out performance with comments from BoE's Weale (soft hawk, dissenter) this weekend who said interest rates need to rise, and the BoE should focus on outlook for prices in 2 to 3 years, not current inflation rate. (Telegraph) Separately BoE’s Haldane (neutral) said that markets have probably overreacted and “what we have seen over the past week is financial markets catching up with the data”. (Observer)

COMMODITIES

The December WTI crude future contract is seen flat in the North American open as participants look ahead towards the OPEC meeting in Vienna scheduled on the 27th of October and any commentary in the intervening time period that may indicate whether or not the cartel will act to counter the recent slide in prices. In relevant news, Saudi Arabia’s oil exports have fallen to their lowest in three years in August while volumes used by local refineries rose to a record high. The country exported 6.663mln bpd, down from 6.989mln bpd in July. (RTRS)

Copper traded near a six-month low as weak fundamentals and the prospect of fresh supply continues to weigh on prices at the start of LME Week in London. Although China was said to have injected new liquidity in to the banking system over the weekend, markets keenly await tomorrow’s China industrial production and GDP numbers for growing evidence of a slowdown in the world’s biggest copper consumer.

Goldman Sachs sees downside risk to its 6-month copper forecast of USD 6,600/mt as seasonal factors, a once-in-twentyyear supply cycle and lack of China demand for financing deals could will result in a major LME stockpile build. The bank also maintains its 3-month and 12-month forecasts of USD 6,660/mt and USD 6,200/mt respectively. However, Goldman remains bullish on nickel over the next 6-12 months as high-grade nickel ore stocks to be drawn down. (BBG)

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DB's Jim Reid Concludes the Overnight Recap

So what have we learnt from a pretty fascinating and testing week for markets. Above all else we've been given a pretty big clue that global markets still need stimulus to maintain positive momentum. The mere suggestion by Bullard (a non-voter) on Thursday that instead of his previous preference for a Q1 hike, he might actually support an extension of QE, sent markets spiking higher in the last trading session and a half of the week. The S&P 500 and Stoxx 600 ended the week +3.6% and +5.4% above their Thursday intra-day lows with both indices ending the week just -1% lower.

The Fed was not the only central bank making dovish noises as the market was falling last week. In the UK, on Friday the BoE’s chief economist said on Friday that economic data since June had left him “gloomier” about the economy to the extent that he now thought that, “interest rates could remain lower for longer, certainly than I had expected three months ago.” The ECB’s Coeure said on Friday that the ECB Governing Council is, "ready to take additional non-conventional measures, if needed," whilst also commenting that the ECB, “will start within the next days to purchase the assets that are foreseen under our new purchase programmes, with the objective to steer the balance sheet of the ECB to a higher level.” Easing noises were also coming out of China later in the week as Bloomberg News reported that the PBOC is set to inject around 200bn Yuan into some national and regional lenders to help them prepare for year-end liquidity needs according to, “a government official familiar with the matter.”

So with all this attention on central banks, as this week progresses markets will likely start focusing on the 2-day FOMC next Tuesday/Wednesday. Although there's no planned press conference the statement will be heavily anticipated as will whether they decide to keep the last legs of QE going. I'd imagine most would think it unlikely that they will but much might depend on what transpires this week. If Bullard's turnaround continues to reassure the market then maybe there is less need to heed his advice.

Wrapping up the market moves on Friday, credit markets reflected the positive sentiment as Main and Xover closed 5bps and 30bps tighter respectively in Europe whilst US credit indices saw similar moves. Bond markets in the European periphery recovered some of the widening earlier in the week, led by 10 year yields in Greece which rallied 84bps to close below 8%. Treasuries and Bunds were weaker both closing 4bps wider whilst the VIX also fell sharply, ending Friday down almost 10points at 22 from its Wednesday high.

Asian markets are following the stronger US tone from Friday. Bourses in Hong Kong, Sydney, Shanghai and Seoul are up +0.3%, +1%, +0.3% and +1.5% respectively. Whilst in Japan, equities have received a boost with the Topix rallying 3.7% following a report in the Japanese press over the weekend that the $1.2tn Government Pension Investment Fund plans to raise its allocation target for domestic shares to 25% from 12%.

Looking ahead, in lieu of the FOMC meeting next week, one of the biggest data points of the week is US CPI on Wednesday. As Joe Lavorgna pointed out to us, since late June the 5-year breakeven inflation rate has declined roughly 60 bps to 1.5% and now stands at the lowest level since September 2011 (1.4%). So the inflation number over the next few months could have a large impact on the Fed's ability to raise rates over the next 12-18 months. We still think they'll struggle to raise rates much before the next recession when they'll be forced into QE again.

It looks set to be a busy rest of the week for economic data too. We will get Chinese investment and retail sales reads on Tuesday as well as Q3 GDP. Later on Tuesday we'll also get US existing home sales data, whilst the EU, Ukraine and Russia are scheduled to hold gas talks in Brussels. On Wednesday we will get the BoE's latest minutes and the aforementioned September CPI data for the US. Thursday is PMI day as we see the October PMI reads for Japan, China, France, Germany, the euro area and the US. Given current global growth concerns this numbers looks set to be even more important than usual, with particular focus on the European releases. Also on Thursday we will get French October manufacturing and business confidence, UK September retail sales, US jobless claims, the Chicago and Kansas Fed activity indices and EU leaders will meet for a summit. Finally on Friday we will get the latest China property price data, the November German GfK, Italian August retail sales and September wage growth, UK Q3 GDP, US new home sales data and French unemployment. The rating agencies are also set to release their latest rating reports on Germany, Italy and Spain. In terms of other major earnings reports this week, in Europe we have GSK, Credit Suisse, Daimler, Tesco, and BASF reporting whilst in the US Verizon, Boeing, Dow Chemical, AT&T, Caterpillar, Amazon, Microsoft, P&G and Ford are all releasing earnings.

Also on the agenda this week are the results of the ECB’s AQR and stress tests which are expected to cover around 130 banks, with the results of the probe set to be officially published on Sunday. The banks will get the results a few days earlier so it may be inevitable that leaks start to occur later in the week.