Today we'll learn more about whether Mr Draghi becomes Super Mario in the near future as the widely anticipated ECB meeting is now only a few hours away. We will do another summary preview of market expectations shortly, but in a nutshell, nobody really expects Draghi to announce anything today although the jawboning is expected to reach unseen levels. The reason is that Germany is still staunchly against outright public QE, and Draghi probably wants to avoid an outright legal confrontation. As DB notes, assuming no new policy moves, the success of today's meeting will probably depend on the degree to which Draghi indicates the need for more action soon and the degree to which that feeling is unanimous within the council. Over the past weekend Weidmann's comment about falling oil prices representing a form of stimulus highlights that this consensus is still proving difficult to build. It might need a couple more months of low growth and inflation, revised staff forecasts and a stubbornly slow balance sheet accumulation to cement action.
As if hypnotized by Draghi's perpetual inability to actually do anything (as opposed to say), a massive barrier of selling has emerged at the 120 level in the USDJPY. It will surely be taken out later today in a major stop hunt, which will in turn push US futures, whether bought by central banks or not, to new record highs, while the Japanese currency ploughs on to SocGen's point of no return, first at 123 then at 145, and then at #Div/0. Another question has emreged on European bonds: if and when Draghi does finally implement sovereign QE, will that be the signal to sell everything? Judging by the reaction in the US fixed income market, bonds have sold the news in each of the previous 3 QE episodes. Why should Europe be any different?
European equities have lacked direction and remain marginally higher ahead of today’s ECB & BoE rate decision with both central banks expected not to take any action. On a sector basis, consumer discretionary is the best performer, however energy stocks have been lagging as the FTSE 100 marginally underperforms given its large gearing toward resource based firms. In stock specific news, Ryanair opened the session significantly higher trading as high as 8.5% after raising their FY profit forecast with easyJet higher by 2.4% in sympathy with the move.
In Fixed income, Bunds have traded sideways and remained relatively unchanged as this morning’s session which has been directionless aided by the lack of pertinent macro news ahead of the ECB press conference. Elsewhere, the Spanish Tresoro sold a total of EUR 3.5bln as the Spanish 10y printed a record low yield at 1.840%; the French Tresor selling combined 4bln in 2023, 2025 and 2027 bonds as expected. Ahead of the ECB conference, analysts at Credit Suisse say risks are skewed toward ECB under-delivering on investors' expectations for sovereign QE given recent moves in EUR rates market.
In China, equity markets are extending their gains to 3 year highs with the strong performance overnight being largely driven by large caps and brokers. The CSI 300, Shanghai Composite and Shenzhen Composite are up +2.9%, +2.3% and +1.6% overnight to be up +31%, +34% and +39% YTD. Money market rates were lower in China overnight whilst expectations of a RRR cut seems to be building up. In terms of year to date performance in Asian equities, China has closed the gap sharply and is not that far off from the Modi-driven rally in India and would say those two markets are broadly on par now. Whilst on this our Asian economists now expect China to decelerate from 7.3% in 2014 to 6.9%yoy in 2015H1, dragged by weak property investment. Contingent on supportive policy actions, they see risks to the outlook as balanced. Lagged effects of monetary policy easing, together with more expansionary fiscal policy, will pull up GDP growth to 7.2% in 2015H2. In India, data show an economy still treading sideways, but sharply rising consumer and business sentiment bodes well for the cycle. An investment recovery and re-acceleration in consumption seem likely in the coming year.
In summary, today's key drivers and changes: ECB, Bank of England meetings today. Ruble erased gains; Putin gives annual speech. U.K. house price growth slowed last month. The Dutch and French markets are the best-performing larger bourses, Swedish the worst. The euro is little changed against the dollar. German 10yr bond yields rise; Spanish yields increase. Commodities gain, with natural gas, wheat underperforming and nickel outperforming. U.S. jobless claims due later.
Market Wrap
- S&P 500 futures up 0% to 2073.6
- Stoxx 600 up 0.2% to 350.1
- US 10Yr yield down 0bps to 2.28%
- German 10Yr yield up 2bps to 0.76%
- MSCI Asia Pacific up 0.6% to 140.5
- Gold spot down 0.4% to $1202.4/oz
Bulletin Headline Summary from RanSquawk and Bloomberg
- With the lack of any tier 1 data or speakers, markets have lacked any firm direction ahead of the BoE at 1200GMT/0600CST & ECB at 1245GMT/0645CST and the ECB press conference at 1330GMT/0730CST
- Treasuries steady before BOE and ECB decisions on interest rates, with Draghi press conference scheduled for 8:30am ET; Nov. nonfarm payrolls tomorrow, est. +230k with unemployment rate holding at 5.8%.
- 2Y yield has risen more than 10bps from Monday’s low, including 4bps increase Tuesday after Fed vice-chair Stanley Fischer said policy makers were getting closer to dropping “considerable time” language from its statement
- After pledging last month to raise inflation “as fast as possible,” Draghi is looking for consensus on what further action the ECB can take amid German disquiet over bond- buying and a wait-and-see approach by his own vice president
- ECB should follow U.S. example and accelerate bond purchases to stimulate economic recovery, la Repubblica reports, citing interview with Fed’s Fischer
- Saudi Arabia will probably deepen discounts for crude supplies to Asia after leading OPEC to maintain the group’s output target amid a global battle for market share
- Putin pledged to punish speculators attacking the ruble with “harsh” measures in a defiant speech that reached into Russian history to defend his annexation of Crimea and compared his international opponents with Adolf Hitler
- U.S. health-care costs grew 3.6% to $2.9t in 2013, the smallest increase in more than 50 years and one that probably won’t be matched soon as spending accelerates to meet the needs of millions gaining insurance under Obamacare
- Obama exceeded his constitutional authority with an executive order allowing as many as 4m undocumented people to stay in the U.S. temporarily, a coalition of U.S. states claimed in the first lawsuit filed over the immigration action
- In American health-care worker who may have been exposed to the Ebola virus in West Africa is headed to a U.S. hospital for evaluation and possible treatment
- Sovereign yields mostly higher. Asian, European stocks, U.S. equity-index futures gain. Brent crude rises, gold and copper falls
US Event Calendar
- 7:30am: Challenger Job Cuts y/y, Nov. (prior 11.9%)
- 8:30am: Initial Jobless Claims, Nov. 29 est. 295k (prior 313k); Continuing Claims, Nov. 22, est. 2.318k (prior 2.316m)
- 9:45am: Bloomberg Consumer Comfort, Nov. 30 (prior 40.7)
Central Banks
- 7:00am: Bank of England seen maintaining 0.5% bank rate
- 7:45am: ECB seen maintaining 0.05% main refinancing rate
- 8:30am: ECB’s Draghi holds news conference
- 8:30am: Fed’s Mester speaks in Washington
- 12:30pm: Fed’s Brainard speaks in Washington Supply
FX
In the FX market, EUR/USD initially fell below the 1.2300 handle before staging a recovery to trade back above Aug. 2012 lows, a move primarily attributed to the pullback from multiyear highs observed in the USD-index. Elsewhere, USD/JPY remains in close proximity to the 120.00 level to the upside, which is a large size option expiry (2.1bln) for today's 10am NY cut (1500GMT). Moreover, the RUB has weakened this morning following a public address from Russian President Putin who appeared to blame the West for the situation in Ukraine. Overnight, the AUD/USD traded slightly weaker, ignoring stronger retail sales as more banks look for more cuts from the RBA.
COMMODITIES
The metals complex shows divergence among spot gold and silver following Russian President Putin’s somewhat aggressive statements blaming the West for the ongoing problems in Ukraine. Furthermore, Platinum trades higher by around 1% helped by the slight strength of the RUB as Russia is the second largest producer of the metal. In precious metal related news, earlier reports emerged that China are said to consider loosening restrictions on gold imports, according to Bloomberg. The energy complex has been relatively quiet with the USD broadly flat with direction on the session to be dictated by the open of the NYMEX pit.
DB's Jim Reid concludes the overnight recap
Today we'll learn more about whether Mr Draghi becomes Super Mario in the near future as the widely anticipated ECB meeting is now only a few hours away. DB's Mark Wall is not expecting anything concrete to be delivered with no new commitments to asset purchasing or tweaks to the tLTRO terms. He thinks that the council remains in wait and see mode until the impact of the current ABS/covered purchase programmes and take up from the Dec 11th tLTRO2 are known. Mark's team continue to believe that a broad based asset purchase scheme (including Government bonds) will be announced by the end of Q1 but unlikely before. Assuming no new policy moves, the success of today's meeting will probably depend on the degree to which Draghi indicates the need for more action soon and the degree to which that feeling is unanimous within the council. Over the past weekend Weidmann's comment about falling oil prices representing a form of stimulus highlights that this consensus is still proving difficult to build. It might need a couple more months of low growth and inflation, revised staff forecasts and a stubbornly slow balance sheet accumulation to cement action.
In terms of trading, given that I'm confident broad based QE is coming I don't think setting up for disappointment today is a particularly fruitful policy. It might work for a short while but given the illiquidty, especially in assets like credit, one would have to be confident of a big move wider in the short-term or a view that the ECB will never quite be able to pull the trigger. We think we'll get a few small hints today and the trigger in Q1. As such we continue to be bullish European credit.
Away from Europe and the ECB, the recent Fed speak on balance has been viewed to be more hawkish than what the market was prepared for. Indeed earlier this week we heard from both Dudley and Fischer who seemed keen to emphasise that that normalisation of short term rates is just a matter of time. Yesterday Philly Fed’s Plosser noted that US recovery is well advanced and that means “we should no longer be conducting monetary policy as if we were still in the midst of a financial crisis or in the depths of a recession". He added that "Keeping the funds rate target near zero when inflation is close to our goal
and the economy is near full employment is both unprecedented and risky”.
Speaking on financial market stability and in her first public address since joining the Fed, Governor Lael Brainard also said that Fed should be prudent and circumspect in using monetary policy to combat financial stability risks because of its broad effects on the economy. Treasuries bear flattened modestly overnight in reaction to these comments with the 2yr closing 2bp higher at 0.55% with the 10yr falling 1bp to 2.28%. The June 2016 Fed Funds implied rate is 8.5bp higher this week.
In terms of other markets equities were higher on both sides of the Atlantic. The S&P 500 (+0.38%) and Dow (+0.18%) made new highs whilst the Stoxx600 was more than half a percent higher on the day. Brent was lower once more to close just below US$70/bbl whilst WTI was slightly higher on an unexpected decline in US crude inventory. Energy stocks added another 1% to be up for a third day in a row. Its hard to say if we are forming a bottom here but it does seem that the correlation between crude oil and energy stocks have somewhat faded in recent days.
Switching to Asia, Japan’s upcoming election and the ongoing rally in Chinese equities are the two notable market themes for now. On Japan local polls are pointing towards a landslide victory for PM Shinzo Abe’s ruling LDP in the Dec 14th parliamentary elections. Local polls by four news outlets all showed that LDP was set to win around 300 seats in the 475-seat lower house. A convincing victory should strengthen the government’s mandate for Abenomics and increases the prospect of PM Abe staying in office through 2018. Indeed in a scenario where LDP wins 295 or more seats our Japanese macro strategist thinks equities could rise sharply and JPY will weaken more with temporary upward pressure on JGB yields due to further currency depreciation.
In China, equity markets are extending their gains to 3 year highs with the strong performance overnight being largely driven by large caps and brokers. The CSI 300, Shanghai Composite and Shenzhen Composite are up +2.9%, +2.3% and +1.6% overnight to be up +31%, +34% and +39% YTD. Money market rates were lower in China overnight whilst expectations of a RRR cut seems to be building up. In terms of year to date performance in Asian equities, China has closed the gap sharply and is not that far off from the Modi-driven rally in India and would say those two markets are broadly on par now. Whilst on this our Asian economists now expect China to decelerate from 7.3% in 2014 to 6.9%yoy in 2015H1, dragged by weak property investment. Contingent on supportive policy actions, they see risks to the outlook as balanced. Lagged effects of monetary policy easing, together with more expansionary fiscal policy, will pull up GDP growth to 7.2% in 2015H2. In India, data show an economy still treading sideways, but sharply rising consumer and business sentiment bodes well for the cycle. An investment recovery and re-acceleration in consumption seem likely in the coming year.
Away from Asia, the Russian Ruble bounced off its record lows yesterday on reports of central bank intervention. Russia’s central bank yesterday said that it spent US$700m of its FX reserves to support the currency on Monday which also marks its first intervention since fully free floating the Ruble on Nov 10. The currency hit another fresh low against the Dollar of 54.87 yesterday morning before recovering to close at around 53.2. The Ruble is still the worst performer in the EM world this year though after having lost around 38% of its value against the US Dollar. Its a similar story in the EM credit space with Russia 5Y CDS being the standout laggard amongst peers. Russia CDS is around 120bp wider this year which compares with the c.35-40bps YTD spread tightening in Indonesia, Hungary, Thailand and Turkey.
Moving onto today, we have more Fed speak to look forward to with Fisher (on the Texas economy and monetary policy), Mester (opening remarks at a Financial Stability conference) and Brainard (keynote address on Financial stability) lined up for today. Weekly jobless claims will be the only notable release ahead of tomorrow’s NFP. All eyes will be on ECB today as previewed above although we also have the BoE’s policy meeting although consensus is not looking for any major changes there.
