The relentless regurgitation of the only two rumors that have moved markets this week, namely the Japanese sales tax delay and the "surprise" cabinet snap elections, was once again all over the newswires last night in yet another iteration, and as a result the headline scanning algos took the Nikkei another 1.1% higher to nearly 17,400 which means at this rate the Nikkei will surpass the Dow Jones by the end of the week helped by further reports that Japan will reveal more stimulus measures on November 19, although with US equity futures rising another 7 points overnight and now just shy of 2050 which happens to be Goldman's revised year-end target, the US will hardly complain. And speaking of stimulus, the reason European equities are drifting higher following the latest ECB professional forecast release which saw the panel slash their GDP and inflation forecasts [38]for the entire period from 2014 to 2016. In other words bad news most certainly continues to be good news for stocks, which in the US are about to hit another record high, with the bulk of the upside action once again concentrated between 11:00 and 11:30am [39].
[40]
Those looking for bad economic news got another boost out of China which reported an across the board miss last night when it announced that October's Fixed Assets Investments (+15.9% YTD yoy v +16.0% expected) and Retail Sales (+11.5% yoy v +11.6% expected) both missed but Industrial Production (+7.7% yoy v +8.0% expected) was a quite notable miss and immediately spun as bullish for even more PBOC intervention, which however continues to be in the form of direct liquidity injections, this time into small banks.
So with global growth continuing to founder, oil prices not unexpectedly dipped lower once more with Brent dropping further below $80, or $79.56 at last check, with WTI the usual $3 or so below, and making life for US shale companies increasingly more difficult. Them, and oil exporting nations too, after the Ruble once again dipped by 1% overnight but it was the Nigerian Naira which tumbled once again to fresh record lows, as the oil-exporting nation pain hits a crescendo.
European equities languish firmly in the green in a continuation of the price action seen overnight, whereby Japanese equities saw further upside from continued expectations of a sales-tax delay and possible snap election. Furthermore, European equities continue to drift higher following the latest ECB professional forecast release which saw the panel slash their GDP and inflation forecasts for 2014/15/16, which has helped hammered home the point that further stimulus may be warranted in the Eurozone. On a sector specific basis, utilities are the sole underperformers in the European equity sphere following a less than impressive pre-market report from RWE (-2.6%). The strength in stocks subsequently supressed some of the price action in fixed income markets, with Gilts holding tight following their sizeable gains yesterday. However, heading into the North American open, fixed income products have begun to tick higher following the ECB forecasts and their potential implications for the future path of ECB policy
Looking at the rest of the day ahead, today we will get the JOLTS report in the US, which while delayed by a month remains one of Yellen's favorite economic indicators. In terms of what to expect from the JOLTs release today, in order for Yellen to be comfortable that the labour market has returned to more of a normalized state, the hiring and quits rates each need to improve several tenths from their current readings (3.3% and 1.8% respectively). We also have the initial jobless claims print and October budget statement. Fed member Plossner will also be speaking today. In Europe ECB’s Lautenschlaeger will be speaking this morning and we are expecting Coeure to speak this afternoon in New York so will keep an eye open for any interesting developments there.
Bulletin Headline Summary from RanSquawk and Bloomberg
- Europe follow suit from Japan and push stocks higher while
- Brent crude futures break below USD 80.00bbl for the first time since 2010 as the glut of global supply continues to weigh on prices with no further indications of action from OPEC at their upcoming meeting.
- Looking ahead, attention will turn towards the weekly US jobs report, DoE inventories and any comments from ECB’s Coeure and Lautenschlaeger.
- Treasuries steady before week’s refunding auctions conclude with $16b 30Y bonds; WI yield 3.095% compared to 3.074% award in October.
- China’s slowdown deepened in October as reports showed factory production rose 7.7% Y/y, second weakest pace since 2009, investment in fixed assets expanded the least since 2001 from January through October; retail sales also missed forecasts
- China’s leaders have discussed lowering the 2015 economic growth target and see the need for the goal to be below this year’s level of about 7.5%, said a person with knowledge of the talks
- China’s central bank is inviting selected city commercial banks in some provinces, including Jiangsu and Zhejiang, to apply for cash injections, according to an official with knowledge of the matter
- Japan’s Abe is likely to call a snap election next month after postponing an unpopular sales-tax increase slated for October 2015, according to people with knowledge of his plan, who asked not to be identified because they aren’t authorized to speak
- The EU and the U.S. will weigh further sanctions against Russia’s economy and Ukrainian separatists, after the reported movement of tanks, artillery and combat troops into eastern Ukraine
- A London house-price index fell to a four-year low in October, putting the capital at the forefront of a property slowdown in the wake of new rules on lending, according to the Royal Institution of Chartered Surveyors
- ECB’s Survey of Professional Forecasters shows 2015 GDP estimate lowered to 0.8% from 1.0% predicted in August, 2015 at 1.2% from 1.5%
- Sovereign yields mixed. Nikkei +1.1%, Shanghai -0.4%. European stocks, U.S. equity-index futures higher. Brent crude falls 1% to trade below $80/bbl, gold steady, copper lower
US Event Calendar
- 8:30am: Initial Jobless Claims, Nov. 8, est. 280k (prior 278k); Continuing Claims, Nov. 1, est. 2.347m (prior 2.348m)
- 10:00am: JOLTS Job Openings, Sept., est. 4.8m (prior 4.835m)
- 2:00pm: Monthly Budget Statement, Oct., est. $117b (prior - $90.584b)
Central Banks
- 12:30pm: Fed’s Plosser speaks in Philadelphia
- 12:45pm: Fed’s Yellen speaks in Washington
- 3:30pm: Fed’s Kocherlakota speaks in Stanford, Calif.
Market Wrap
- S&P 500 futures up 0.3% to 2042.4
- Stoxx 600 up 0.5% to 336.9
- US 10Yr yield little changed at 2.37%
- German 10Yr yield little changed at 0.81%
- MSCI Asia Pacific up 0.4% to 141.9
- Gold spot little changed at $1162.6/oz
FX
In FX markets, in a somewhat counter-intuitive move EUR is actually outperforming GBP with technical buying seen in EUR/GBP after a break above 0.7900, underpinning the bid in EUR/USD alongside large expiries in the EUR/USD pair as 6bln sits between 1.2400-1.2500 which rolls off at the 10am NY cut. Elsewhere, the USD has weakened slightly in recent trade as AUD and NZD have rebounded against the USD with tech buying seen in AUD and NZD after stops taken out at 0.8750 and a break above 0.7900. Thus AUD has erased some of the downside seen overnight following comments from RBA assistant Governor Kent who refused to rule out intervention on AUD, with AUD now supported by rising copper prices and further hopes of Chinese stimulus following the weak overnight Chinese data.
COMMODITIES
In the energy complex, WTI and Brent crude futures trade with further losses, with Brent crude futures residing below the USD 80.00bbl level after breaking below the handle for the first time since 2010 overnight. Despite the larger than previous drawdown in the API inventories yesterday, markets are instead placing focus on the Saudi Oil Minister dismissing any talk of a price war and offering no response to recent fall in prices. In the metals complex, price action is relatively muted with both spot gold and silver residing in relatively neutral territory with participants looking out for any further developments regarding the Ukraine/Russia situation. However, copper prices continue to outperform, with weak Chinese IP and retail sales figures furthering calls for the PBOC to provide the Chinese economy with additional stimulus.
To summarize, European shares remain higher with the tech and chemicals sectors outperforming and oil & gas, utilities underperforming. S&P futures also rise. Chinese October industrial production data was below estimates. Japan’s Abe said likely to call snap election. Ruble weakens most among emerging markets. Companies including SABMiller, Rolls-Royce, Ahold, RWE, GDF Suez released results.
The Swedish and German markets are the best-performing larger bourses, Dutch the worst. The euro is stronger against the dollar. Japanese 10yr bond yields fall; Greek yields increase. Commodities decline, with natural gas, Brent crude underperforming and corn outperforming. U.S. jobless claims, monthly budget statement, JOLT job openings due later.
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Deutsche's Jim Reid concludes the overnight recap
There’s only one direction to head to as we start this morning and that's to China. As we go to print the latest monthly stats are out. October's Fixed Assets Investments (+15.9% YTD yoy v +16.0% expected) and Retail Sales (+11.5% yoy v +11.6% expected) were largely in line with expectations but Industrial Production (+7.7% yoy v +8.0% expected) was a notable miss. The credit and money supply stats are not yet out but are certainly also worth monitoring. As for overnight markets, the Shanghai Composite is off the intraday lows but still -0.2% lower on the day. There seems to be also some profit-taking in Chinese small caps ahead of the start of the stock connect next week. The initial market reaction to the Chinese data has been somewhat muted but let's see how we finish the day. Staying in China, Chinese leaders have apparently discussed lowering the 2015 GDP target below 7.5%. According to Bloomberg, the government discussed targets of 7%, 7.3% and 'below 7.5%'. Away from China markets are fairly mixed in Asia this morning. Momentum in the Nikkei (+0.98%) remains solid although bourses in Korea (-0.6%) and Australia (-1.4%) are both lower.
Next up this morning will be the important European CPI numbers with data out of Germany, France, Italy and Spain. Clearly these data points are going to be quite important in influencing the ECB into the timing of additional policy action so will be widely watched. Our economists think an eventual downgrade of the growth and inflation outlook could be a pre-cursor to Public QE.
Before all this, yesterday was a fairly resilient day for US equities even though the S&P 500 (-0.07%) saw a halt to its five-day streak of fresh record highs. There wasn't a whole lot going on although Utilities (-2.03%) and Energy (-0.92%) were the main laggards yesterday. The latter was probably affected by what was another weak day for Oil which saw Brent dip below US$80/bbl for the first time since September 2010 (more below). Exelon Corp (-4.31%) suffered its biggest drop in almost 18 months which weighed on the Utilities sector on news that the US and China have deepened their promise to fight climate change. Presidents Obama and Xi have agreed upon capping China carbon emissions by 2030 and have agreed to further cut emissions in the US by 2025. This marks a particularly important step for China with Beijing having previously been uncommitted around the subject. On the data front, we saw a fairly subdued US wholesale inventories print (+0.3% mom vs. +0.2% mom expected) and MBA new mortgage applications reading (+1.1%). Fed speak offered more interesting sound bites with Kocherlakota reiterating his expectation that PCE inflation will not reach 2% until 2018 whilst also urging other Fed members to defer raising interest rates until they are confident that the target will be hit within one to two years.
In comparison the day wasn't as pleasant for European markets. The Stoxx 600 declined 1.14%, dragged lower by financials following news that regulators have fined select lenders in relation to the probe over FX manipulation. This all came after a fairly non-eventful Eurozone industrial production print with the +0.6% mom reading, a shade under expectations of +0.7%. Elsewhere in Europe we also had a fairly dovish BoE inflation report yesterday with few notable changes to its medium-term inflation or growth forecasts. DB's Dr. Buckley noted that 2yr-ahead forecasts for inflation remained at 1.8% whilst the 3yr-ahead view was a few basis points below the 2% inflation target. Unsurprisingly near term inflation was revised down given the weaker data outturns whilst the downward growth revisions were on the whole reasonable with the MPC expecting 0.7% qoq growth until mid-2015 and then slowing to a series of 0.6s and 0.7s thereafter (from 0.8% and 0.7% respectively). The ILO unemployment figure was in line with the previous quarter at 6.0% (5.9% expected) however there was some encouragement from yesterdays wage growth print. The headline figure was fairly subdued with growth of just 1.0% however George pointed out that we have seen some encouraging momentum over the past six months as private sector regular pay (so excluding bonuses and the public sector) has not fallen once on a % mom basis and has risen at an annualized rate of 3.7% over that time which marks the fastest rate over six months since 2008. Gilts were notably stronger on the day, the 10yr fell 4bps lower to 2.19% whilst Bunds were 2bps tighter not helped by a weaker wholesale price index print in Germany (-0.6% yoy).
Staying in Europe, Jens Weidmann of the German Central Bank warned that the ECB would encourage euro zone states to pile up debt if it were to buy state bonds again (Reuters). Weidmann went on to say that ‘expansionary monetary policy is fundamentally appropriate and that it’s understandable that the ECB has discussed additional measures’. Although Weidmann was one of the 18 eurozone members backing more unconventional measures to stimulate the economy, he referred to the one trillion euro balance sheet expansion as an ‘expectation’ and not a target.
Central banks are still likely to be heavily influenced by the inflation outlook and on that note the continued fall in energy prices is likely to be important even if it doesn't directly impact the core numbers. As mentioned above Brent broke below the US$80 mark yesterday and it’s held those levels overnight in Asia, trading at $79.96/bbl as we write. Sentiment around oil continues to wane with Bloomberg suggesting that OPEC will refrain from removing a surplus triggered by booming US shale output. On the topic of oil prices, our US colleague Oleg Melentyev has put together some work on the US high yield energy sector with regards to a potential ‘tipping point’ for the cohort following a further slump in the oil price. The basic premise of the note is that the US HY energy sector sits at the higher end of the credit quality scale and for this reason enables companies to absorb oil price shocks. However a WTI price of $60/bbl could likely be enough to push the whole sector into distress. It’s certainly worth a read as the one thing that's been stable in this summer/autumn HY sell-off has been fundamentals. This is one sector where this is some serious debate about fundamentals and future default risk.
Wrapping up the news flow from yesterday, there was further news (Bloomberg) out of Ukraine who are reported to be redeploying troops in the east of the country following NATO comments that the alliance had seen Russian troops and tanks entering in the last few days. Russian CDS spreads were fairly steady closing just around 3bps wider yesterday to 278bp whilst the MICEX was also little changed.
Looking at the rest of the day ahead, today we will get the JOLTS report in the US. This print is based off the same sample used for nonfarm payrolls and average hourly earnings however the reading is a lagging economic indicator covering September as opposed to the October nonfarm prints last week. However, as our US colleagues point out, the JOLTS report is on Yellen’s dashboard of economic indicators as two components of the report (the hiring and quits rates) are incorporated in the Fed’s labour market conditions index. In terms of what to expect from the JOLTs release today, in order for Yellen to be comfortable that the labour market has returned to more of a normalized state, the hiring and quits rates each need to improve several tenths from their current readings (3.3% and 1.8% respectively) whilst the recent trend in claims data might suggest that the two series should improve significantly over the next several quarters. That aside, we also have the initial jobless claims print and October budget statement. Fed member Plossner will also be speaking today. In Europe ECB’s Lautenschlaeger will be speaking this morning and we are expecting Coeure to speak this afternoon in New York so will keep an eye open for any interesting developments there.
