Despite last night's Nikkei futures smash [41], in the hours that immediately followed, algos had an easy time levitating both European stocks and US futures on the usual no volume, until suddenly, a little after the European open, the European commission released an Easter egg when it finally admitted, with less than 2 months left in the year, that a European triple dip is in the card, when it slashed its May growth and inflation forecasts across the board for not only Europe but the rest of the world as well.
The commission said it now expects gross domestic product in the 18-country Eurozone to grow 0.8% this year, down from 1.2% growth it forecast this spring. In 2015, the eurozone economy will likely grow 1.1%, also less than the 1.7% growth seen in the spring. In 2016, growth in the currency union will rise to 1.7%, the commission said, as the WSJ summarized [42]. Needless to say this latest set of expectations by Jean-Claude "You have to lie" Juncker, will also be severely over-optimstic, and we eagerly look ahead to 2015 growth being slashed to negative at the next EC growth revision in six months.
[43]
Yet what is strange is that while traditionally such a major downward growth revision would have been sufficient to send futures soaring - why: because in a world where only central banks are left, it means more central bank global bailouts of course - this time the adverse update actually had the impact of sending futures to their lows of the session, granted just a few tiny points since the market is clearly disconnected with even the most pro forma, non-GAAP version of reality, but the reaction direction was clearly unexpected.
Perhaps this is explained by the ongoing devastation in both WTI and Brent, which were trading at $76.70 and $82.50 at last check, both down almost 3% as the plan to use Saudi Arabia to crush Russia has instead backfired and the Saudi princes are now openly looking at destroying the US shale infrastructure, as we forecast in the worst [44], for Obama, scenario.
So looking at fixed income and equity markets, European equities enter the North American open, mostly in negative territory as participants shrug off initial BoJ-inspired gains, with attention instead turning towards the EU Commission who cut their Euro-Area growth and inflation forecasts for 2014 and 2015. The continuation of the slide seen in WTI prices has placed further heavy pressure on energy-related names, with the energy-heavy FTSE 100 being squeezed as a result. In terms of this morning’s earnings reports, they painted a relatively mixed picture with the notable outlier Hugo Boss (-5.7%) after they cut their FY forecasts. On an index specific basis, the FTSE MIB leads the way for Europe, with Banca Monte dei Paschi (+12.2%) higher after NIT Holding Limited said it has proposed a EUR 10bln investment for the Co.’s restructuring. Elsewhere in Italy, both Snam and Terna trade firmly in the green after yesterday’s heavy losses that buoyed the index.
Fixed income products initially softened alongside the higher open in European equities, with news that Apple are to launch Euro-denominated bonds and hawkish comments from ECB’s Nowotny who went against his ‘never say never’ attitude on Friday, also adding to the downside. Nonetheless, heading into the North American open Bunds have staged a turn around with some analysts suggesting that yesterday’s sell-off is somewhat overdone, with other analysts also suggesting short-covering head of the ECB on Thursday and thus prices have broken back above 151.00. However, this move was then further extended by the aforementioned EC forecasts, with German, France and Italy’s growth prospects all being cut.
In FX markets, AUD continues to recover from overnight losses, which stemmed from the Australian ABS revising their unemployment rate higher to 6.2% from 6.1%, with markets instead focusing on the RBA dropping their ‘AUD remains historically high’ phrase. Elsewhere, EUR/USD continues to remain magnetised by 5.9bln due to roll-off at 1.2500 for today’s NY cut, while GBP has slipped back below 1.6000 following the lacklustre UK construction PMI release (61.4 vs. Exp. 63.5 (Prev. 64.2)) which came in at a 5-month low. Furthermore, the USD-index has given back some of yesterday’s gains underpinning JPY and thus dragging USD/JPY back below 114.00.
WTI crude futures trade down USD 1.60 after extending on yesterday’s losses, with WTI closing below USD 80/bbl for the first time since 2012 after Saudi Arabia lowered its prices for US crude exports amid speculation that stockpiles increased. Saudi Arabia cut its price of oil to the US in December while raising prices to Asia. The state-owned producer Saudi Aramco lowered the premium for Arab light relative to us gulf coast benchmarks by USD 0.45 per barrel. Some analysts also suggest that the European Commission slashing their growth forecasts have also hampered energy prices due to the impact on demand for future oil consumption. Elsewhere, spot gold consolidated above recent lows overnight as the USD-index marginally weakened overnight while a lack of physical demand and weak technicals present a bleak outlook for the yellow metal.
Market Wrap
European shares reverse earlier gains and fall with the oil & gas and tech sectors underperforming and real estate, financial services outperforming. The European Commission cut its growth forecasts for the euro area. Companies including Glencore, Santander, BMW and Continental had results.
Saudi Arabia cut prices for crude exports to U.S. customers. The Spanish and Dutch markets are the worst-performing larger bourses, the Swedish the best. The euro is stronger against the dollar. German 10yr bond yields fall; French yields decline.
Commodities decline, with WTI crude, Brent crude underperforming and natural gas outperforming. U.S. ISM New York, factory orders, trade balance due later.
- S&P 500 futures down 0.2% to 2007.5
- Stoxx 600 down 0.1% to 333.8
- US 10Yr yield down 2bps to 2.32%
- German 10Yr yield down 4bps to 0.81%
- MSCI Asia Pacific up 1.4% to 142.3
- Gold spot up 0.3% to $1169/oz
Bulletin headline summary from Bloomberg and Ransquawk
- European equities slip mostly into negative territory, shrugging off initial gains as focus shifts towards the EU Commission cutting their Euro-Area growth and inflation forecasts for 2014 and 2015.
- Energy markets continue to see further misery, with WTI at its lowest level since Oct’11 as participants continue to react to Saudi Arabia slashing prices for US crude exports.
- Looking ahead, attention turns towards the release of US trade balance, factory orders, API inventories and US mid-term elections
- Treasuries gain, led by long end, as traders await ADP tomorrow, ECB Thursday, October nonfarm payrolls Friday; bunds higher as European Commission cuts growth forecasts for euro region.
- European Commission lowers 2014 GDP forecast for euro region to 0.8% from 1.2%, 2015 to 1.1% from 1.7%; says inflation in the euro area will be even weaker than ECB predicts
- Japan’s Government Pension Investment Fund will have to buy $187b of Japanese and foreign equities to meet the asset-allocation targets it set last week, based on June holdings
- JGB 30Y yield has fallen as much as 20.5bps in two days to reach 1.39%, lowest since April 2013, following BOJ decision last week to boost bond purchases to JPY80t ($704b) annual pace
- Republicans appears poised to gain the six seats needed to win control of the Senate, even if that outcome isn’t immediately known late Tuesday or early Wednesday
- JPMorgan said it faces a U.S. criminal probe into forex dealings and boosted its maximum estimate for “reasonably possible” losses on legal cases to the highest in more than a year
- Oil tumbled, with West Texas Intermediate falling 2.6% to $76.75/bbl, as Saudi Arabia cut the cost of its crude to the U.S.
- Ukrainian President Petro Poroshenko said rebel-held elections in the country’s east violate a two-month-old cease-fire, as he threatened to scrap the law granting greater autonomy to the separatist regions
- Israel pushed forward with plans to build homes in east Jerusalem, defying U.S. criticism of measures that would expand the Israeli presence on territory the Palestinians claim for a future state
- China plans a $16.3b fund to finance construction of infrastructure linking its markets to three continents as President Xi Jinping pushes forward with his plans to revive the centuries-old Silk Road trading route
- Sovereign yields lower. Asian stocks mostly higher, Nikkei +2.7% as Japan returns from holiday. European stocks, U.S. equity-index futures decline. Brent crude lower, copper and gold gain
US Event Calendar
- 8:30am: Trade Balance, Sept., est. -$40.2b (prior -$40.1b)
- 9:45am: ISM New York, Oct. est. 62 (prior 63.7)
- 10:00am: Factory Orders, Sept., est. -0.6% (prior -10.1%)
- 10:00am: IBD/TIPP Economic Optimism, Nov., est. 46.5 (prior 45.2)
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DB's Jim Reid concludes the overnight recap
The conclusion from yesterday's global PMIs was that the US are behaving like Real Madrid and Europe, and in particular Italy, like Liverpool. The final European manufacturing PMIs were generally a touch weaker with the Eurozone print revised lower to 50.6 with Italy the underperformer (49 vs 50.6 expected and 1.7 points lower than last month). The US surprised on the upside coming in at 59.0 (vs. 56.2 expected, +2.4 points on last month and the highest since March 2011). In the pdf today we've updated our PMI vs YoY equity table to take into account yesterday's numbers. The data is based on a regression between the two variables over several years of data. This simple analysis suggests that given current ISMs, equity markets are too low in the US, Germany, UK and Spain and too high in Japan and Italy. However can the US PMI really stay at these levels if global activity continues to be soft and will Japan's increased asset buying mean that Japan equities stay above where activity suggests it should be in a similar way to US equities did during QE3. The answer to the latter question is probably yes so we only use the table as a guide to valuations.
Markets in Europe were weaker yesterday following the softer data and some weaker corporate earnings. There also seemed to be fairly low expectations ahead of the ECB on Thursday which weighed on markets. The Eurostoxx closed -1.0% and the Dax -0.8% although the main underperformers were the peripheral assets led by the FTSE MIB with a 2.1% decline whilst 10 year yields in Italy and Spain rose 7bps with Portugal and Greece 12bps and 10bps higher respectively. The Euro sold off 0.35% versus the Dollar.
Italy's data didn't help the peripherals yesterday, and Spanish politics is quietly bubbling under the surface due to both ongoing Catalonian tensions and also with some chatter about Sunday's El Pais poll putting Podemos - a left wing insurgent party set up only 10 months ago - in the lead nationally having seen support surge over the past month. Most observers think this is largely a protest reaction after recent political scandals but the evidence from Syriza in Greece, the Five Star movement in Italy and even UKIP in the UK (to name but a few) show that these new radical parties can create serious political shockwaves even if they've yet to make the leap into power. However the risk is that one day we may wake up to a maverick political leader elected somewhere in Europe given recent trends. The irony is that the ECB don't want to let politicians off the hook and are therefore being careful with public QE. However the longer they leave it the higher the risk that they help elect politicians that will be much more confrontational towards them and ones that they will struggle to do business with at all.
Talking of elections, it’s the US mid-terms today and in my career I can't remember such a low level of interest in it from a financial market point of view. Perhaps that's because there's been such a gridlock politically in recent years that nobody really expects much to change afterwards. Governments around the world are not really politically able to drive or shape growth at the moment and everything is being left to central bankers. It’s unlikely that much will changes after these elections.
Whilst we’re on the US price action was fairly volatile yesterday as an early boost from the PMI print was offset later in the day with a sell-off in the energy sector causing the S&P to close fairly flat (-0.01%). Credit markets mirrored the moves in equities whilst the DXY Index rallied a further 0.4%. Interestingly we saw the Fed’s Fisher applauding the FOMC’s action, or lack of it, in response to the recent market volatility after reporting that he chose to vote with the majority of policy makers last week. After dissenting against the September policy decision, Fisher acknowledged the positive wording in the statement this time round with regards to the labour market and mentioned that the US economy is headed towards increasing employment and inflation rising to the 2% target. Just wrapping up the US, yesterday we had the quarterly Fed bank lending survey which was fairly uneventful on the whole with a ‘modest net fraction of banks easing their standards’ during the period. The report also stating that a large majority of banks expect an increase in retail business lending over the next year.
Looking at markets in Asia this morning, there seems to be no sign of a breather in Japan following yesterdays public holiday as the Nikkei (+3.3%) and Topix (+3.0%) extend Friday’s rally, the former index briefly rose above the 17,000 level for the first time since 2007 whilst the Yen is 0.51% lower versus the Dollar and 30y JGB’s 13bps tighter. Elsewhere in Asia markets are largely muted with bourses in China, Hong Kong and Taiwan broadly unchanged. The Aussie Dollar is +0.46% versus the US Dollar as we type following strong retail sales data and a wider trade deficit whist the RBA kept rates on hold as expected.
Core markets aside, the Russian ruble weakened 0.8% versus the Dollar yesterday to extend declines to nearly 25% over the calendar year after Germany warned the nation of stronger sanctions following news that elections organized by pro-Russian rebels in eastern Ukraine were backed by a Russian foreign minister. Meanwhile a Reuters report yesterday quoted a senior NATO general as saying that ‘Russia’s border with eastern Ukraine has softened to the point of becoming completely porous’.
Before we look at the day ahead, it’s worth noting the movements in the oil price yesterday. Brent declined 2.1% and WTI -0.7% after Saudi Arabia, the largest OPEC producer, slashed prices for oil sold to the US. This follows price cuts earlier last month which prompted concerns over OPEC members looking to capture market share. As we reported in yesterday’s EMR, October was the month that Oil officially dipped into bear market territory and so far this month we’ve seen little evidence of this trend correcting.
Looking at the agenda today, we’ve got the European Commission forecasts to look forward to which will be interesting ahead of the ECB on Thursday. Peripheral nations will be worth keeping an eye on with the Spanish unemployment figure and ECB member Costa speaking at a conference on the Portuguese economy. Away from Europe and other than the mid-terms in the US, we’ve got the September factory orders print and the latest trade data which our US team highlighted yesterday could influence the Q3 GDP number.
