Another day, another case of central banks, not one but two this time, dictating "price" action.
On Saturday, traders woke up to the following headlines from the ECB's Constancio, which the market promptly digested and spun as bullish from more ECB QE, leading to one after another bank pulling forward their estimates of first bond monetization by Mario Draghi (CSFB now believes it will take place in December from Q1 of 2015):
- ECB'S CONSTANCIO SAYS CURRENT SITUATION DIFFERENT FROM 2012
- CONSTANCIO SAYS INFLATION SHOULD BE IN HANDS OF MONETARY POLICY
- CONSTANCIO SAYS INFLATION VERY CLOSE TO ZERO IS `DANGEROUS'
- CONSTANCIO SAYS DEFLATION `VERY NASTY'
- CONSTANCIO SAYS ECB SHOWING WILLINGESS TO DO MORE IF NEED BE
So the "deflation monster" is "very nasty", got it.
Colorful rhetoric aimed at 5-year-olds aside, the Portuguese central banker said no decision has been made yet on buying sovereign bonds but if banks finding existing measures insufficient then the ECB will have to consider buying other assets including sovereign bonds. This follows last week's comments from Draghi when he said he would "do what we must to raise inflation and inflation expectations as fast as possible". As a result there has been a fresh round of calls for an ECB programme and as such has benefited peripheral fixed income products. This has led to the Spanish 10yr yield breaking below 2.0% and Italian 5yr below 1.0% for the first time.
And then to further make the BTFATH case, Reuters reported citing an "unnamed official" that China's Friday rate cut is just the first of many [45], and as a result the entire fixed income curve across Chinese product has repriced substantially, even as the Chinese Yuan is starting to crack on what we hinted weeks ago will be a devaluation of the currency as China is now, in the words of BNP, "losing the currency war." This happens when in a delayed session (the Friday PBOC announcement took place after China close), Asia risk assets rallied higher across the board, led by a relative outperformance in Chinese assets. The CSI 300 Shanghai Composite and the Hang Seng are currently +3.24% and +2.04% respectively. China 5y CDS is also 2bp tighter. CNH has opened some 0.1% weaker versus the Dollar. Markets in Japan are closed but major bourses in Korea and Australia are also +0.72% and +1.08% stronger respectively.
US equity futures are also poised for another session at record highs thanks to a German IFO business climate print which followed last week's ZEW rebound, and rose for the first time in 7 months, printing at 104.7, above the 103.0 expected, up from 103.2 in October. Expect more multiple expansion just that much more on their way to a 20x GAAP P/E on the S&P 500.
Finally, with volumes exceedingly thin headed into Thanksgiving, this week’s eco calendar relatively light, and Japan away from market overnight the mandated wealth effect levitation is set to continue: even crude has managed to bounce modestly from extremely oversold conditions, on hopes this week's OPEV meeting will result in a production cut. Perhaps the only place where central banks are so far failing to buoy prices is iron ore futures which fell below $70/tonne for the first time since 2009.
Overnight Bulletin Headlines
- Peripheral banks lead the way higher for European equities as ECB’s Constancio provides yet more dovish rhetoric from the central bank regarding a potential sovereign QE programme.
- Sentiment for Europe has also been further bolstered by a strong German IFO release, in what has been a relatively quiet session.
- Looking ahead, the main data release will be the US services PMI figure in what is set to be a relatively quiet session.
- Treasuries fall before week’s $105b note auctions begin with $28b 2Y notes; WI yield 0.565% vs 0.425% in October.
- German business confidence unexpectedly rose for the first time in seven months, with the Ifo institute’s business climate index increasing to 104.7 in Nov. (est. 103) from 103.2 in Oct.
- Italy, France and Germany will face off over how to rebuild euro-area growth when the European Commission passes judgment this week on their draft budgets
- Greek government officials will meet in Paris tomorrow with troika representatives in a bid to break a deadlock over freeing up the last tranche of the country’s bailout
- China is poised to deliver deeper interest rate cuts after last week’s unexpected decision to reduce borrowing costs for the first time since 2012
- With the deadline for their nuclear talks just hours away, the U.S. and Iran took up the fall-back option of putting more time on the clock
- Iran may propose that OPEC cut its output target by as much as 1m barrels a day to halt the slide in crude prices when the country’s oil minister consults with his Saudi counterpart before the group gathers this week
- Nearly $41b IG priced last week, $10b high yield. BofAML Corporate Master Index OAS narrows 1bp to 134 from YTD wide 135; YTD low 106. High Yield Master II OAS narrows 7bps to 454. YTD range 508-335bps. CDX High Yield closed at 106.96 from 106.48; YTD range 104.52-109.15
- Sovereign yields mixed. Tokyo closed for holiday; Asian and European stocks, U.S. equity-index futures higher. Brent crude, copper gain; gold falls
US Event Calendar
- 8:30am: Chicago Fed Nat Activity Index, Oct., est. 0.40 (prior 0.47)
- 9:45am: Markit US Services PMI, Nov. preliminary, est. 57.3 (prior 57.1); Markit US Composite PMI, Nov. preliminary, (prior 57.2)
- 10:30am: Dallas Fed Manufacturing Activity, Nov., est. 9 (prior 10.5)
DB's Jim Reid concludes the overnight recap
With China cutting rates unexpectedly and with Draghi earlier expressing urgency about the need to return inflation back towards target ("without delay") it does feel that most countries still want to ease and with the BoJs recent move, it seems that if you stand still you might actually be at risk of effectively tightening policy. If anyone should doubt Draghi’s dovishness he also said they would "do what we must to raise inflation and inflation expectations as fast as possible". For us government QE in Q1 continues to be a near inevitability but we may still have enough conflict within the ECB that may mean December is still too early. Whatever the timing it was clear that the market was surprised by the explicitness of the speech. The Stoxx 600 closing 2.06% higher, Xover rallying 16bps and the euro selling off 1.2% versus the dollar. Yields in the periphery were also significantly lower with the 10 year benchmark yield in Italy, Portugal and Spain down 9bps, 13bps and 9bps to 2.21%, 2.98% and 2.01%, respectively.
Turning our attention over to China, the PBOC certainly surprised the market with a 25bps cut in the benchmark deposit rate to 2.75% and 40bps cut in the lending rate to 5.60%. The Central Bank also lifted the ceiling on deposit rates to 1.2x of the benchmark deposit. DB’s Chief Chinese Economist, Zhiwei Zhang, wrote on Friday that he believes this marks the beginning of a policy easing cycle, given that the policy stance has clearly changed from marginally loose towards broad based easing. He also expects this easing cycle to last for the full year of 2015 and continues to expect two rate cuts in 2015 (first cut of 25bp in Q2 and second 25bp cut in Q3). So why act now given that China is still on track to meet the ‘around 7.5% growth target this year? Zhiwei believes that a plausible answer could be as a result of the cumulative fiscal pressure at the local government level that has built up this year. He points out that local governments revenues have suffered from the sharp slowdown in land sales in 2014 as well as a rising LGFV debt burden – given this, he argues that a rate cut is the most effective way for a central government to help lower their finance costs. With regards to the impact on FX, given that the government is now willing to use traditional monetary tools, our FX strategist believes that the use of RMB as a form of monetary policy will likely wane and as a result China will likely start to gradual weaken the currency given that on a REER basis, the RMB is already very expensive.
Asia risk assets are rallying higher across the board this morning, led by a relative outperformance in Chinese assets. The CSI 300 Shanghai Composite and the Hang Seng are currently +3.24% and +2.04% respectively. China 5y CDS is also 2bp tighter. CNH has opened some 0.1% weaker versus the Dollar. Markets in Japan are closed but major bourses in Korea and Australia are also +0.72% and +1.08% stronger respectively.
Some of these overnight moves could have been also been a continuation of what was a fairly positive US risk session last Friday. The S&P 500 closed +0.52% to mark the fifth consecutive week of gains and further extend record highs. Most sectors were higher on the day but materials (+1.26%) and energy (+1.22%) were the main outperformers. The recent respite in crude was probably a driver for that as we’ve now seen Brent and WTI bounce around 4% off their recent lows to trade at around $81/bbl and $77/bbl as we type. Interestingly despite a stronger day for equities, Treasuries were mostly stronger across the curve last Friday. The 10y was 2bps lower to 2.325% with the only data release for the day being the Kansas City Fed’s manufacturing which came in a tad firmer than expected (7 vs. 6 expected).
Staying on the theme of oil, Thursday’s OPEC meeting at Vienna will be a closely watched affair. There has been no shortage of news-flow around the event recently with prices declining sharply over the last couple months in anticipation that OPEC will not cut production. In recent weeks it appears that the camp has become split with the likes of Saudi Arabia and other low-cost producers with large FX reserves happy to run down the price to gain market share. On the other hand the likes of Venezuela and more recently Iran are reported (Bloomberg) as saying that they may propose a 1m a day cut in barrels produced. They are campaigning for higher prices to balance their budget and improve fiscal positions. We will no doubt hear further statements this week from producers in the run up to the meeting so it’s something to keep an eye on.
Coming back to Europe quickly, over the weekend Bloomberg have reported that the EU is planning a new leveraged fund as part of EC president Juncker’s investment plan. The article suggests that the €21bn fund is designed to have a proposed leverage rate of 15x, with the idea that private investors will be able to share the risks of new projects and kick-start those currently under-resourced.
Just staying in the region, there was news ( Financial Times) in Greece on Friday that the government has failed to come to an agreement with the Troika over bailout monitors around the reported fiscal gap. This is important given that the program legally expires at the end of this year and places greater importance of striking a deal ahead of the December 8th meeting of eurozone ministers that would set the terms of a bailout exit. It appears that the disagreement stems from Athens’ argument that accelerating economic growth next year, along with various fiscal measures, will close the perceived fiscal gap set at €2bn of the 2015 budget by the Troika. With no date set for the arrival of the Troika in Athens however, and further implications to consider down the road with regards to ECB support of Greek banks, it’ll be worth keeping an eye on how events progress as we run into the end of the year.
In terms of the day ahead, this morning will likely be highlighted by the IFO print out of Germany with the market expecting the readings to be unchanged versus last month. Later on today and across the pond we get the Chicago Fed and November flash services and composite PMI’s with again the market expecting little change versus last month.
Finally, with regards to the week ahead, it looks like that there will be no sign of a breather for markets with a packed macro calendar to look forward to. Starting in the US, things kick into gear tomorrow when we have the preliminary release of Q3 real GDP. DB's Joe Lavorgna notes that information released since the advance GDP release indicated modestly more consumption and inventories last quarter than what the bureau of economic analysis had assumed in its initial snapshot- Joe points out that this should offset most of the downward revisions to exports and construction and so he expects minimal revision. Elsewhere in the US tomorrow we get readings for consumer confidence, Case-Shiller and FHFA house price data. Closer to home in Europe tomorrow we start the day with Germany’s Q3 GDP release. The market is looking for a +0.1% qoq print and comes following the weak flash PMI reading last week. As we mentioned then our German economists are expecting GDP to stagnate through the next two quarters and haven’t ruled out the potential for a negative quarter so it’ll be interesting to see what we get. Elsewhere we get a host of further data out of Germany including government spending and private consumption along with Italian retail sales and Spanish PPI. Elsewhere we will get the OECD outlook with Japan's Kuroda speaking in the morning so it'll be interesting to see what comes of that. We start Wednesday closer to home with GDP in the UK. Later in the day we’ll see mortgage applications out of the US, closely followed by another raft of prints in the region including durable goods, claims, personal income, new home sales, Michigan confidence and the monthly and year-on-year PCE core and deflator readings are also out. Thursday will bring a break in proceedings with Thanksgiving in the US. However that’s not to say things slow down in Europe with eurozone consumer confidence due along with money supply. The market however will likely be more focused on the CPI, retail sales and unemployment prints for Germany. We round Thursday off with business confidence in Italy and Spanish GDP and CPI. The day after Thanksgiving of course brings the well known ‘Black Friday’ which also coincides with a relatively low data day in the US with just the Chicago PMI. Japan will likely hog the spotlight however with CPI, retail sales, industrial production and housing starts to print. Elsewhere in Asia we get leading indicators out of China. We round the week off in Europe with the all important CPI and unemployment readings for the Eurozone.
