Freefalling Yen Levitates Equities Around The World

Confused why in the lack of any horrible economic news (unless of course someone leaked a worse than expected November payrolls print which would put QE4 right back on the table) futures are higher, especially in the aftermath of yesterday's disappointing ECB conference? Then look no further than the Yen which has now lost pretty much all control and is in freeplunge mode, rising some 25 pips moments ago on no news, but merely as wave after wave of momentum ignition algos now make a joke of the Japanese currency, whose "Panic Premium" line of 123 (as defined by SocGen [28]) is now just 240 pips away. At this pace, Japan's economy, which as reported yesterday has just seen a record number of corporate bankruptcies due to the plummeting yen, may well be dead some time next week. Which, with Paul Krugman as its new and improved economic advisor, is precisely as expected. RIP Japan.

The other main focus of today’s session stems from yesterday’s after-market ECB source report which suggested that the ECB are said to prepare broad based QE package in January. This, in addition to the freefalling yen, has helped equities to rebound (Euro Stoxx +1.4%) with out-performance in peripheral equities and fixed income products with peripheral spreads tighter to the German benchmark. Oddly enough, when Draghi spoke yesterday, the market's reaction was diametrically opposite: one wonders how many BIS trading desks were need to turn sentiment around by 180 degrees. Both ECB’s Weidmann and Nowotny have been on the wires this morning, with Weidmann providing his usual hawkish stance and as such failing to move the market, while Nowotny modestly deviated from his usual hawkish stance by saying that he agrees with Draghi’s stance with regards to QE.

In FX markets, USD/JPY has been buoyed by stronger equities making a firm break of 120 trading at its highest levels since 2007. Polls also suggest that Japan’s LDP party may take a super majority which would further help the Abenomics QQE campaign. EUR/USD has traded sideways and GBP/USD has retraced its overnight losses.

WTI, Brent and Gold all trade slightly lower on a lack of any fundamental news and the USD index in small positive territory up +0.2%. More specifically for metals markets, Copper prices pared some of yesterday’s gains amid the subdued tone seen across commodity prices and Chinese iron ore futures also declined as steel mills and traders are said to be cautious on restocking due to oversupply in the market. Nickel prices are on track for a weekly gain of nearly 6% on continued support after Indonesia upheld its raw-ore export ban.

In terms of today’s calendar, we kick this morning off in Europe with the second estimate of Q3 GDP data for the Euro-area along with German factory orders and Spanish industrial output. Away from payrolls and employment data this afternoon in the US, we’ll also have the October trade report, factory orders and consumer credit. There’s also more Fedspeak to look out for with Mester (on financial stability) and Fischer (on fiscal policy) but payrolls will likely be the main focus for today.

In summary: European shares rise, close to intraday highs, with the construction and autos sectors outperforming and basic resources, oil & gas  underperforming. Crude oil declines for fourth day. German factory orders ahead of ests., Bundesbank cut its economic forecasts for the country through 2016. The Italian and Spanish markets are the best- performing larger bourses, Swiss the worst. The euro is weaker against the dollar. Japanese 10yr bond yields fall; Greek yields decline. Commodities decline, with WTI crude, Brent crude underperforming and natural gas outperforming. U.S. factory orders, trade balance, consumer credit, nonfarm payrolls, unemployment, average earnings, labor force participation due later.

Market Wrap

• S&P 500 futures up 0.1% to 2073.8
• Stoxx 600 up 1.1% to 348.8
• US 10Yr yield up 2bps to 2.26%
• German 10Yr yield down 1bps to 0.76%
• MSCI Asia Pacific down 0.1% to 140.5
• Gold spot down 0.1% to $1204/oz

Bulletin Headline Summary

• European equities enter the North American crossover in the green following yesterday’s pro-QE ECB source comments, with peripheral fixed income products seeing outperformance.
• USD/JPY continues its uptrend as it extends its move above the 120.00 handle.
• Looking ahead, the market looks forward to US Non-Farm Payrolls, Unemployment Rate and Factory Orders with comments expected from ECB’s Visco (Soft Dove), Fed’s Mester (Soft Hawk) and Fed’s Fischer (Soft Dove)
• Treasuries decline before report forecast to show U.S. economy added 230k jobs in November with unemployment rate holding at 5.8%.
• ECB expects to consider a proposal for broad-based asset purchases including sovereign debt at the next meeting on Jan. 22, said two euro-area central-bank officials familiar with the deliberations
• At least three ECB officials, including board members Yves Mersch and Sabine Lautenschlaeger and Bundesbank’s Jens Weidmann, are said to have opposed Draghi’s statement yesterday that bank’s balance sheet “is intended to move toward the dimensions it had at the beginning of 2012”
• The Bundesbank halved its forecast for German GDP growth next year, predicting an expansion of 1% compared with its June outlook of 2%
• Weidmann, speaking in Frankfurt, it is not sensible to advocate German fiscal stimulus to revive euro-area economy; Euro-area governments have to take long, arduous reform path, must make sure “monetary policy doesn’t become instrument for other goals”
• China’s bad-loan ratio may have been understated by at least a third in the second quarter as an economic slowdown weakened borrowers’ ability to repay debts
• China President Xi Jinping says China economy is within reasonable range, the Xinhua News Agency reports, citing       Xi speaking at a meeting on Dec. 1
• JPMorgan put another of its MBS traders on leave, the latest in a string of suspensions amid regulatory scrutiny of the market, according to three people with knowledge of the move
• Ex-UBS Group AG trader Roger Darin, facing U.S. charges of manipulating Libor, claims he’s in a “Kafkaesque situation” that bars him from working or leaving his home country of Switzerland.
• Sovereign yields mostly lower. Asian, European stocks, U.S. equity-index futures gain. Brent crude declines, gold little changed, copper rises

US Event Calendar

• 8:30am: Change in Nonfarm Payrolls, Nov., est. 230k (prior 214k)
  • Change in Private Payrolls, Nov., est. 225k (prior 209k)
  • Change in Manufact. Payrolls, Nov., est. 15k (prior 15k)
  • Unemployment Rate, Nov., est. 5.8% (prior 5.8%)
  • Average Hourly Earnings m/m, Nov., est. 0.2% (prior 0.1%)
  • Average Hourly Earnings y/y, Nov. est. 2.1% (prior 2%)
  • Average Weekly Hours All Employees, Nov., est. 34.6 (prior 34.6)
  • Underemployment Rate, Nov. (prior 11.5%)
  • Change in Household Employment, Nov., est. 320k (prior 683k)
  • Labor Force Participation Rate, Nov. (prior 62.8%)
• 8:30am: Trade Balance, Oct., est. -$41.2b (prior -$43b)
• 10:00am: Factory Orders, Oct., est. -0.0% (prior -0.6%)
• 3:00pm: Consumer Credit, Oct., est. $16.5b (prior $15.924b) Central Banks
• 8:45am: Fed’s Mester speaks in Washington
• 2:45pm: Fed’s Fischer speaks via video to IMF event in Washington

DB's Jim Reid concludes the overnight summary

It was a case of "Thursday lunchtime's alright for fighting" for the ECB yesterday. We discussed before the meeting that it was unlikely that they would deliver anything new yesterday but it’s quite clear that behind the scenes things are tense. As we said yesterday we would be reluctant to trade any disappointment themes as we think full QE is coming by the end of Q1 and that the market would/will soon appreciate that. In the 3 hours post the conference it seemed disappointment was the order of the day though. Even though he mentioned QE more times than ever before in his monthly grilling, the market still sold off during and after the press conference. However just as Europe was commuting home, Bloomberg carried a story that the ECB Governing Council "expects to consider a proposal for broad-based asset purchases including sovereign debt next month". The source was "two euro-area central-bank officials familiar with the deliberations". A conspiracy theorist might suggest that politically Draghi was always going to struggle to put such an explicit message across in the press conference at this stage and perhaps this story reflected the broader council's view that someone wanted to articulate.

DB's Mark Wall summed up yesterday's meeting nicely with the title of his wrap-up being "friction on the path to inevitable QE". For us the divide is evident when even the replacement of the word expectation with "intended" - with regards to returning the ECB balance sheet to 2012's levels - was not unanimous. It seems like a lexicographer is needed these days at ECB meetings! However Draghi reiterated that important monetary policies had previously been put in place without unanimity so he does seem to be paving the pave for QE by majority if not by all. He also made the point of addressing legality concerns by saying that not pursuing the ECB's primary legal mandate of price stability would be illegal.

So we can't get away from the view that things are getting tense within the ECB. However at either the January 22nd meeting or the March 5th one, the ECB is likely to commence a broad-based asset purchase scheme whether everyone is behind it or not. The DB view has been that March is more likely but yesterday's Bloomberg article means we can't rule out January.

Looking at market reaction yesterday, the Stoxx 600 traded in a narrow range ahead of ECB but dropped as much as 0.7% as an initial reaction immediately following Draghi’s comments on ‘reassessing stimulus next quarter’ and was then compounded further following the central bank downgrades to inflation and growth expectations. The Stoxx600 closed the day 1.29% lower to post its biggest one-day fall since the October 15th sell-off. The Euro spiked to an intraday high of $1.246 (+1.20%) before settling at around $1.238 during the overnight session in Asia. Ten-year Bund yields initially dropped to an intraday low of 0.733% only to reach an intraday high of 0.785% before closing the day at around 0.773%. Xover closed 7bps wider in line with the softer risk tone in equities whilst the 10yr benchmark yields in Spain and Italy also widened by around 5-6bps on the day. So it was a fairly volatile day for European assets overall but US markets did rally back on the Bloomberg story after the European close.

Staying on the same theme the ECB now forecasts inflation of 0.5% for 2014 which is a touch lower from a previous forecast of 0.6% as recently as three months ago. Beyond this year the ECB expects inflation to be 0.7% and 1.3% in 2015 and 2016, respectively. Growth-wise, GDP expectations now sit at 0.8% for 2014, before recovering to 1% in 2015 and 1.5% in 2016. These are all lower than its September's forecast of 0.9%, 1.6% and 1.9% for 2014, 2015, and 2016, respectively.

With much of yesterday's focus being on Europe, it was easy to overlook the further decline in oil. Brent lost another -0.7% yesterday to close at a four year low of $69.43/bbl and has fallen slightly lower again in Asia overnight. WTI closed 0.85% lower at $66.8/bbl yesterday and has lost another 30cents during the overnight session. The US energy sector (-0.8%) posted its first decline this week likely as a reaction to these moves which added further pressure to the overall market. Both the S&P 500 (-0.12%) and the Dow (-0.07%) took a breather yesterday after having made new highs on Wednesday. Treasuries also had a softer day with the 10yr yield around 5bps higher to close at 2.234%. Data was relatively light for the region with just the initial jobless claims print which came in more or less in line with consensus at 297k although on the data front the key focus will be on the much anticipated payrolls today.

For the record, our US economists have a relatively bullish view on this and expect a headline print of 250k (vs 230k market consensus)) which would also mark a significant improvement from last month’s 214k. They noted that the recent strong employment components of the Richmond Fed services survey and non-manufacturing ISM should filter through to a better NFP reading. Unemployment and average hourly earnings will likely be the other highlights of today’s calendar and our colleagues are expecting an unchanged +5.8% unemployment print and a slight tick up in the average hourly earnings to +0.2% (from +0.1% previously) – both in line with the wider market.

Turning to overnight markets the risk tone is generally weaker in Asia following the European/US lead yesterday. Chinese equities are having a very choppy session with the Shanghai Composite falling as much as 3% during intraday but now up +1.7% as we type. Petrochina shares are up 10% (limit up) for the second day in a row. Away from China, HK equities are also enjoying a firm day. The Hang Seng and the HSCEI index are up +0.73% and +1.14% respectively as we type. Asian cash credits are broadly unchanged to a touch firmer across the board with China property bonds seeing some stabilisation after a fairly volatile few days. Technicals are generally robust with jumbo deals being well absorbed by the market.

Before we wrap up for the day, we note that the Russian Rouble weakened a further 2.4% against the Dollar yesterday to close at 54.45. The move comes on  the back of comments from President Putin who vowed to punish speculators attacking the ruble with ‚harsh? measures in a defiant speech (Bloomberg). Russia’s 5y CDS widened by 7bps yesterday to 369, whilst the yield on the 10y (local) Government bond yield widened a further 27bps to close above 11% for the first time since 2009.

In terms of today’s calendar, we kick this morning off in Europe with the second estimate of Q3 GDP data for the Euro-area along with German factory orders and Spanish industrial output. Away from payrolls and employment data this afternoon in the US, we’ll also have the October trade report, factory orders and consumer credit. There’s also more Fedspeak to look out for with Mester (on financial stability) and Fischer (on fiscal policy) but payrolls will likely be the main focus for today.