For the second night in a row, overnight futures touched record highs and then promptly receded driven, as is now the norm, entirely by the Yen carry trade, with USDJPY almost breaking through what has emerged as resistance just around 115.50, before retracing overnight gains, following repeat comments from Japanese government officials that sharp moves in the Yen in either direction are undesirable. Unfortunately for Japan, at this point it is too late to talk up the Yen, and the speed and volatility of the downward move is likely to only accelerate from here, the only question is when.
Speaking of sharp downward FX moves, the pain for the petroleum exporters was front and center once more as both the Russian and Nigerian currency crashed in early trade, but subsequently rebounded following confirmed intervention by the Nigerian central bank, as well as positive sentiment in Russia as a result of possible Russian central bank intervention when a report was floated the central bank would meet, as well as comments by the FinMin Siluanov who launched forward guidance and expected the Ruble to strengthen soon, and upcoming talks between US and Russian officials, which may lead to an easing in the recent re-escalation of Ukraine tensions, which deteriorated again earlier today following the usual unvalidated Ukraine report that some 32 Russian tanks had entered Ukraine.
Completing the overnight macro picture, was the German September Industrial Production report, which missed again, rising 1.4%, below the 2.0% expected. As a reminder it was the -4.0% August plunge in German industrial production that was one of the catalysts of the October swoon. This is what Goldman said: "Industrial production rebounded in September, but less than market expectations. That said, the sharp decline in August was revised somewhat smaller, leaving the level of IP in September slightly higher than expected. On a quarterly basis, industrial production declined -0.3%qoq in Q3."
Markets in Asia look set to end the week on a positive note. The Nikkei has erased some of yesterdays losses and is +0.6% at the time of writing whilst bourses in China (+1.4%), Korea (+0.3%) and Hong Kong (+0.5%) are trading in the green. After declining yesterday, the Yen is mostly unchanged versus the Dollar at ¥115.27. S&P futures are relatively muted ahead of the European open.
European shares fall, reversing earlier gains, with the banks and tech sectors underperforming and basic resources, oil & gas outperforming. Companies including ArcelorMittal, Allianz, Swiss Re, Richemont released results. The Spanish and Italian markets are the worst-performing larger bourses, the U.K. the best. The euro is stronger against the dollar. Japanese 10yr bond yields rise; German yields increase.
Furthermore, the pullback in the USD-index from overnight highs has also provided the commodity complex with some upside and thus has seen basic materials and energy name outperform to the benefit of the FTSE 100. Elsewhere, Allianz’s (+4.9%) impressive pre-market report has helped halt the move to the downside for the DAX which trades with modest gains of 0.3%. Fixed income markets continue to hold fire (albeit in marginal negative territory) with volumes exceedingly thin ahead of key risk events.
And with that, all eyes move to today's Nonfarm payroll expected to print at 235K, after last month's 248K. Something to keep in mind: the average seasonal adjustment to the October data is almost exactly 1 million, so yet again the fate of the US and global economy, will be determined by an Arima X 13 "fudge factor."
On today's docket: nonfarm payrolls, unemployment, and most importantly, average earnings, as well as U.S. consumer credit.
Market Wrap
- S&P 500 futures little changed at 2027.1
- Stoxx 600 down 0.2% to 336.5
- US 10Yr yield down 0bps to 2.39%
- German 10Yr yield up 2bps to 0.85%
- MSCI Asia Pacific down 0.1% to 140
- Gold spot up 0.3% to $1145.3/oz
Bulletin Highlight Summary from RanSquawk and Bloomberg
- Markets sit on the sidelines of the monthly jobs report from the US with expectations of a 235k print for the headline figure.
- A mild retracement in the USD-index during European trade, provides some respite for the commodity complex, which has subsequently seen energy and basic material names outperform in Europe.
- Looking ahead, all eyes will be on the US nonfarm payrolls report, as well as any comments from the Bank of France conference with BoE's Carney, Feds Yellen, BoJ's Kuroda, ECB's Coeure, Weidmann, IMF's Largarde and Banxico's Carstens all due to appear. FIXED INCOME
FIXED INCOME & EQUITIES
Despite opening in the green (gains of ~0.5%) alongside their US and Asian counterparts, European stocks have pulled off their highs amid thin volumes ahead of today’s nonfarm payrolls release. Nonetheless, the FTSE 100 has outperformed throughout the session, with Sainsbury’s the notable outperformer (up as much as 5%), with no obvious fundamental newsflow, however some analysts noted that Songbird (SBDE LN) rejecting an approach by QIA could encourage Qatar to move back towards Sainsburys. Furthermore, the pullback in the USD-index from overnight highs has also provided the commodity complex with some upside and thus has seen basic materials and energy name outperform to the benefit of the FTSE 100. Elsewhere, Allianz’s (+4.9%) impressive pre-market report has helped halt the move to the downside for the DAX which trades with modest gains of 0.3%. Fixed income markets continue to hold fire (albeit in marginal negative territory) with volumes exceedingly thin ahead of key risk events.
FX
Overnight the USD-index continued its climb higher, while being set for its biggest weekly gain in more than 16-months ahead of today’s NFP report, after gaining to touch its highest level since 30th June 2010. However, the USD-index has since pulled off its highs during European trade with little macro news on offer to dictate the state of play. Nonetheless, USD/JPY continues to trade north of the 115.00 handle while EUR/USD consolidated around yesterday’s post-ECB lows. Also of note for EUR/USD there are 10 yards in option expiries between 1.2500-50, although these are unlikely to come into play given the ECB-inspired losses seen yesterday. Elsewhere, AUD/USD briefly slipped to its lowest level since July 7th 2010 following the RBA’s SoMP release, where the central bank raised its 2016 CPI forecast citing recent declines in AUD, although commodity currencies have been provided some support by the bounce in energy and metals prices. Finally, RUB saw some strength in early European trade following talk of a possible emergency Russian Central Bank meeting.
COMMODITIES
Following movements in the USD-index both gold and silver have retraced some of the heavy losses overnight after spot gold triggered sell stops around USD 1,135.00 to trade at its April 19th 2010 levels, while spot silver approached the USD 15.00 level to the downside overnight. As such, spot gold now resides in positive territory and thus looking to end its spell of 9 consecutive losses. In terms of metal specific news, JP Morgan lowered their gold, silver forecasts for 2014 and 2015, reducing their 2014 gold forecast by 2% to USD 1275 per oz. and 2014 silver forecast by 5% to USD 19.56 per oz.
CME raises natural gas Henry Hub future initial margins for speculators by 14.4% to USD 3410 per contract from USD 2981. (CME)
* * *
DB's Jim Reid completes the overnight recap
I suppose the degree to which you thought Draghi was dovish yesterday depends on the degree to which you thought the much discussed 1 trillion Euro balance sheet expansion was official policy already. If you didn't think it was official policy and were worried it was something Draghi had discussed in the open without full support of the committee then yesterday should be seen as bullish. The fact that Draghi's statement explicitly announced that the ECB has unanimously agreed to target the return of its balance sheet back to early 2012 levels (and in the Q&A March 2012 levels when it was at its peak) is pretty much official confirmation of the policy.
As most people are aware, it will be near impossible to reach such a target without the purchases of Government bonds so yesterday does bring Government QE a step closer. We'd agree with our economists that its likely to be Q1 rather than December as Draghi said that they had tasked ECB staff and committees with "ensuring the timely preparation of further measures to be implemented, if needed". As DB's Mark Wall pointed out, back in June the ECB Council similarly tasked the staff to prepare ABS purchasing, on a precautionary/"if necessary" basis. The decision on ABS purchasing did not come until 3 months later, in September. Even then, full modalities followed a month later. This hints that December might be too soon to expect the next move but Q1 remains a realistic proposition.
So net net this is probably at the upper end of expectations given that he wasn't expected to announce fresh policy action yesterday. Many in the market were disappointed that more details were not discussed but yesterday was always unlikely to be the occasion. The good news is that we now have a firm policy that the ECB can be benchmarked and judged against which is important. If there is a worry for us it is perhaps to question whether such balance sheet expansion is anywhere near enough and over a short enough time frame to be a fire breaker. Draghi suggested the balance sheet would get to the target via tLTROs and asset purchases with the former occurring until June 2016 and the latter taking place over a period lasting over two years. So we'd have to guess that if they do meet their target it will be in late 2016 some two years away.
With this in mind, a simple back of the envelope calculation suggests the balance sheet might increase €500bn ($621bn) in 2015 - ignoring complications with any chunky LTRO repayments. How does this compare to the Fed and the BoJ in recent times and going forward. The Fed expanded its balance sheet by $1100bn in 2013 and $454bn in 2014 (now likely frozen for 2015). The BoJ expanded by $303bn in 2013, $456bn by YE 2014 and likely $696bn in 2015bn (at current exchange rates). For reference the Euro area economy is about 80% of the size of the US economy and the Japanese economy is about 30% of the size. So the BoJ will likely buy 10% more paper in 2015 even with an economy less than half the size. Also Europe will potentially only be expanding its balance sheet at just over half the rate the Fed did at its peak - albeit with a smaller economy. So this is not shock and awe but at least we have a firm(ish) commitment.
In terms of how all this translated into price action yesterday, the Stoxx 600 opened with a weaker tone trading 0.6% lower after some fairly subdued German factory orders data showing a 0.8% increase mom, well below expectations (2.2% mom). Sentiment then turned following Draghi’s comments which saw the Stoxx 600 sharply rally and trade as much as +1.0% at its highs, however these gains were eventually pared back into the close leaving the index +0.2% up on the day. The Euro traded with a similar tone and weakened following the comments to close down 1% versus the Dollar which also marked a two year low. Bunds were unchanged over the course of the day, the 10y at 0.83% whilst peripherals were a notable outperformer with similar maturity yields anywhere from 3bps to 6bps tighter. Credit markets were stronger, Main and Xover 2bps and 8bps tighter respectively.
Touching on the UK both manufacturing (0.4% mom vs. 0.3%) and industrial production (0.6% mom vs. 0.4%) were modestly better than expected whilst there were no surprises coming out of the BoE as rates were left unchanged and no statement made. This perhaps puts greater focus on next week’s inflation report for hints over rates policy.
Back to credit and looking at the latest HY fund flow numbers we can see that North American funds saw further notable inflows over the past week (Wednesday to Wednesday) while in Europe we saw outflows. In North America the inflows of just north of $3bn were a third consecutive week of positive numbers which have totaled $7.6bn cumulatively or around 2.7% of NAV. In Europe after the previous week's strong inflows ($490mn) we once again saw outflows this week of $142mn. Western European HY funds have now seen outflows in 13 of the past 17 weeks for a cumulative total net outflow of nearly $4bn or nearly 10% of NAV. Despite the European numbers disappointing, the US numbers are encouraging for the asset class.
Staying on HY, yesterday we published our latest HY monthly. HY credit remained under pressure through the first half of October with single-Bs spreads hitting fresh wides for the year as volatility rose. Whilst we ended the month comfortably off these wides we reiterate our view that EUR single-B credit provides yields/spreads that may be difficult to ignore with the broader yield environment likely to remain low for some time in Europe. We update the analysis from our previous monthly which suggests that single-B credit looks even more attractive now than it did a month ago. Particularly in light of the fact that the latest lending survey and rating action data continues to be supportive of defaults remaining at historically low levels.
Just recapping the market moves in the US yesterday, the S&P closed +0.4% whilst 10y Treasuries were +4bp wider. In other markets oil resumed its decline after yesterday’s brief rally. WTI (-1.4%) and Brent (-0.5%) fell following reports that OPEC has reduced its crude demand outlook. Elsewhere in Russia, the ruble depreciated a further 3.6% as tensions over fighting in the east of Ukraine overshadowed the move to an effective free float of the currency by the Bank of Russia earlier in the week.
Markets in Asia look set to end the week on a positive note. The Nikkei has erased some of yesterdays losses and is +0.6% at the time of writing whilst bourses in China (+1.4%), Korea (+0.3%) and Hong Kong (+0.5%) are trading in the green. After declining yesterday, the Yen is mostly unchanged versus the Dollar at ¥115.27. S&P futures are relatively muted ahead of the European open.
Elsewhere overnight, Bloomberg have reported that the People’s Bank of China has confirmed that it pumped 770bn yuan into the country’s lenders in the last two months via the new medium-term lending facility with comments that the central bank will create a ‘neutral and appropriate’ monetary environment given the trends in growth and inflation. The report also mentioned that every 500bn yuan is similar to a 50bp cut in the required ratio.
Looking ahead to today we’ve got payrolls data in the US to digest. This comes after a decent claims print yesterday as the reading dropped 10k to 278k (285k expected). Interestingly DB’s Joe LaVorgna noted that the 4-week average has now dropped to 279k which represents the lowest reading since April 2000. He highlighted that over the last 25 years, when claims have hovered around the 280k market this has translated to a 330k increase in nonfarm payrolls. With regards to today’s print, Joe is forecasting a 225k increase with the view that there could be a set of upwards revisions to previous month’s figures. I suppose with rate rising expectations still pared back after September/October's volatility, this risks are probably in a strong number repricing the front end again. So an in-line to slightly softer number would probably be best for risk.
Aside from the payrolls and employment report, we’ve got some notable data releases in Europe today including industrial production in Germany, Spain and France. As well as this we receive trade data in Germany and the UK as well as business sentiment from the Bank of France whilst the ECB’s Coeure will be speaking at a conference in Brussels. Later in the day we will be keeping an eye on the Fed’s Yellen who will also be making a timely appearance when she speaks in Paris just after the employment report.