Yesterday's epic market surge, the biggest Dow surge since December 2011 on the back of the most violent short squeeze in three years, highlighted just why being caught wrong side in an illiquid market can be terminal to one's asset management career (especially if on margin), and thus why hedge funds are so leery of dipping more than their toe in especially on the short side, resulting in a 6th consecutive year of underperformance relative to the confidence-boosting policy tool that is the S&P. And with today's session the last Friday before Christmas week, compounded by a quadruple witching option expiration, expect even less liquidity and even more violent moves as a few E-mini oddlots take out the entire stack on either the bid or ask side. Keep an eye on the USDJPY which, now that equities have decided to ignore both HY and energy prices, is the only driver for risk left: this means the usual pre-US open upward momentum ignition rigging will be rife to set a positive tone ahead of today's session.
On the last trading day of the week, markets have been subdued with most European equities trade lower after coming off best levels with the FTSE MIB among the underperformers due to the weakness seen in the Italian banking sector with Banca Carige shares halted. Furthermore, the SMI is also under pressure as Roche (-5.3%) discontinued their scarletred drug trial with MorphoSys (-8.3%). In fixed income markets, Bunds initially edged lower taking cues from yesterday’s continued post-FOMC sell-off across USTs, but has since pared those earlier losses as choppy price and light volumes dictate the state of play.
One hour ago a Reuters report was released [34]citing ECB sources, stating that in any QE program, officials are looking into making weaker Euro-zone countries face a large cost and take larger risk burdens, the reports further suggest that the ECB could require weaker central banks, such as Greece or Portugal, to make provisions to cover any potential losses from a sovereign bond buying QE program. A step in this direction could help push Germany into accepting a sovereign QE program. However, these comments failed to impact the market and if anything pushed European stocks lower.
Asian equities traded mostly higher after the rally on Wall Street, which saw the DJIA soar over 400 points and the S&P 500 gain the most since Jan’13. Nikkei (+2.39%) led with gains underpinned by further JPY weakness and is on course for its best session since Oct. 31. Hang Seng traded up 1.25% while the Shanghai Comp (+1.7%) pared earlier losses and made its 6th consecutive weekly gain. Further speculation for PBOC stimulus has stemmed from the on-going Chinese liquidity crunch as money-market rates jumped the most since the June 2013 record cash crunch. The 7-day and 14-day Repo rates touched their steepest level since January 2014 while the O/N Shibor rate fixed at its highest since February 6th.
The USD-index has remained flat with most major pairs following suit with USD/JPY trading higher aided by the slightly weaker JPY after the BoJ raised their assessment on output and exports providing some reprieve to the Japanese economy. In addition, RANsquawk sources note of a large USD 10.8bln expiry in EUR/USD at 1.2300 and a USD 3.8bln expiry at 1.2250-60 at the NY cut (1000EST/1500GMT).
In the energy complex, WTI and crude have slightly bounced back from yesterday’s sharp selloff helped by the stable USD. Brent rebounds to $60 as the falling knife catchers attempt to time the lows once again following late day selloff yesterday. "We have seen a little bit of a strike back this week from the market, stabilizing since hitting a new low on Tuesday," says Saxo Bank head of commodity strategy Ole Hansen cited by Bloomberg. "The fact we continue to see bottom fishing could indicate investors are trying to dip their toes back into the market, but we are not out of the woods yet."
Separately, Copper bounced back from yesterday’s lows as it heads for its 1st weekly decline this month, with prices pressured following yesterday’s weak China property data and the current liquidity concerns which has led to increases in Chinese money market rates. Elsewhere, iron-ore prices were marginally higher overnight to halt its prior 9-day decline. In precious metals, Gold has traded relatively range-bound in sympathy with the USD which has been flat due to a lack of macro news dictating movements.
Bulletin Headline Summary
- European equities trade lower with light volumes and choppy price action in a rather subdued session.
- Looking ahead, we have possible comments from Fed’s Evans and Lacker, quadruple witching and Canadian CPI and Retail Sales.
- Treasuries head for weekly loss led by 7Y notes as crude oil advances, ruble strengthens; S&P 500 up ~3% this week, biggest gain since October, after Fed promised patience on rate increases.
- U.S. Treasuries are on track to return about 6% in 2014 led by double-digit gains for 10Y and 30Y sectors, according to BofAML indexes, even as Fed policy evolution pushed 2Y, 3Y yields to highest since 2011
- UST 5/30 curve spread has narrowed by more than 100bps to lowest levels since Jan. 2009
- Banks added to their wins in Washington this month by getting a reprieve from the Volcker Rule that will let them hold onto billions of dollars in private-equity and hedge-fund investments for at least two more years
- While slumping crude prices are projected to boost U.S. economy by leaving more cash in consumers’ pockets, they also threaten to limit growth, tax revenue and job opportunities from Texas to North Dakota, subduing the most rapidly expanding U.S. regions
- ECB could require central banks in countries such as Greece or Portugal to set aside extra money or provisions to cover potential losses from any bond-buying, reflecting the riskiness of their bonds, Reuters reports, citing unidentified officials
- France’s Hollande floated the prospect of scaling back sanctions on Russia, becoming the first major EU leader to offer to ease the Kremlin’s economic pain
- The Swiss National Bank’s resort to negative rates leaves President Thomas Jordan holding a weaker hand for when the ECB ramps up stimulus
- London home prices are losing ground to other U.K. cities as restrictions on mortgage lending deterred buyers in the country’s best-performing market this year
- China revised the size of the economy by $308.8b, adding almost the entire output of Malaysia; GDP of world’s second- largest economy was 58.8t yuan in 2013, according to a nationwide economic census; revision won’t affect 2014 growth
- China’s benchmark money-market rate jumped the most since a record cash crunch in June 2013 as new share sales locked up funds in the banking system
- Sovereign yields mostly higher. Asian stocks gain, European stocks lower, U.S. equity-index futures rise. Brent crude and copper gain, gold lower
US Event Calendar
- 11:00am: Kansas City Fed Manf. Activity, Dec., est. 7 (prior 7)
- 10:00am: Fed’s Evans speaks in Chicago
- 12:30pm: Fed’s Lacker speaks in Charlotte, N.C
***
As usual, DB's Jim Reid concludes the overnight summary
Before we make our final comments of the year regular readers will know I'm one for pointless anniversaries well today marks another one. 5 years ago today on the first very snowy day for years I moved out of London after 14 and a half years and migrated back home to the Surrey countryside. As a result my golf handicap has improved immeasurably but my social life has diminished. I don't get told off for playing my music too loud anymore but I also have to drive to get a pint of milk. I have to commute rather than walk everyday but I don't get so frustrated at having to battling through hoards of people most of the time. I don't pay ridiculously high service charge on a flat anymore but 5 years on I still haven't finished exorbitant refurbishments. What looked a bargain at the time is proving less so with all the building work. Overall I'd recommend it to people who are naturally becoming more anti-social as they age, who love golf, who like to play music louder and who want much, much more space for their money. However be realistic about any house that needs work. It will cost you 3 or 4 times what you think, especially if you get married during the process and have your eyes opened to the finer things in life!!! Who knew the cost of wallpaper! Overall no regrets although my retirement has been pushed back a few decades!!
Having said that if markets extrapolate the past 2 days continuously for a few years maybe I can retire before my building work is finished. The S&P 500 (+2.40%) saw its best 2-day gain (+4.49%) since November 2011 with the Dow (+2.43%) last night seeing its best single-day gain since December 2011. The S&P 500 is now back to just 0.7% off its December 5th highs. Most of the wires seem to link it to the Fed being dovish and using the word 'patient' but the truth is that you could equally say that Yellen made some surprisingly hawkish comments given all that has been going on of late. In reality equity markets were also given a late boost from a turnaround in energy stocks despite what turned out to be a weak day for oil overall. The energy component of the S&P 500 closed +2.13% with the bulk of the gains coming in the last hour of trading as both WTI and Brent rallied 1%-1.5% off their intraday lows at the end of the US session. It was in fact another day of
volatility in oil markets however with significant intraday high-to-low ranges for both WTI (7.97%) and Brent (7.11%). After both grades traded as high as +4% in the morning, WTI (-4.18%) and Brent (-3.12%) closed weaker, dropping to $54.11/bbl and $59.27 respectively – the latter closing below $60 for the first time since May 2009. Comments from the Saudi Arabia oil minister Al-Naimi did little to calm the oil market. Specifically the minister said that ‘it is difficult, if not impossible', that the kingdom or OPEC would carry out any action that may result in a reduction of its share in market and an increase of others. Although the minister did provide some hope for those hoping that the current drop in prices is more of a temporary thing, stating that ‘what we are facing now and what the world is facing is a temporary situation and will pass’.
Credit markets strengthened further, CDX IG closed 4.6bps tighter (nearly 12bps in two days) whilst US HY energy names extended their two-day gains to rally 61bps in cash spread terms. Spreads have now tightened 96bps over the past two days to 780bps – back to last Thursdays levels. Treasuries also swung around, the yield on the 10y benchmark opened at 2.136%, traded to an intraday low of 2.109% and then weakened in the afternoon to close near its wides at 2.208% - 7bps wider on the day. With the market largely focused on further digesting the Fed statement and comments, as well as keeping up with the swings in oil, data yesterday was something of an afterthought although readings were largely unexciting. Jobless claims once again printed below 300k, decreasing by 6k to 289k and nudging the four-week average down to 298.75k. Elsewhere the flash PMI services reading came in weaker than expected at 53.6 (vs. 56.3 expected) and the December Philadelphia Fed business outlook dropped to 24.5 from 40.8 in November – although this still remains at the higher end of the historical range. The leading index series (+0.6% vs. +0.5% expected) was largely in line.
Back to markets and earlier in the day Europe closed notably stronger. The Stoxx 600 finished +2.95% which marked the largest one day gain since November 2011. Energy stocks (+2.12%) benefited from the earlier day’s rally in oil although much of the focus was on the Swiss National Bank who announced that they are to introduce negative interest rates on deposits (- 0.25%) in an effort to curb demand for the Swiss Franc. The Franc weakened as much as 0.7% versus the Euro – only to then retrace the bulk of the losses and finish 0.26% weaker at 1.204 to the Euro. Over in Russia, the ruble closed relatively unchanged (+0.05%) at 61.622 although swung over the course of Putin’s annual conference in which the President appeared to shift the blame for Russia’s woes onto western nations. Putin did however appear to acknowledge a potential for oil prices to stay continually low, noting that ‘under the most negative external economic scenario, this situation can last two years’, and going on to say that ‘if the situation is very bad, we will have to change our plans, cut some things’. Russian equities closed firmer, the $- RTS closed +6.50% whilst 10y hard currency yields rallied 26bps to close at 6.845%. Following the results of the first round of the Presidential election, Greek assets continue to firm. The ASE closed +1.47% and short-end yields bounced further off their recent highs. The 3y notes closed 42bps tighter at 9.556% whilst 5y notes rallied 35bps to 8.956%. Elsewhere, Bunds finished weaker with the 10y yield climbing 2.4bps off Wednesday’s record low to close at 0.617%.
Before we look at the day ahead, markets in Asia are following the US lead this morning with most major bourses trading in the green. The Nikkei (+2.16%), Hang Seng (+1.30%) and Kospi (+1.71%) are all trading firmer, although Chinese equities have bounced between gains and losses. The CSI 300 is currently unchanged and the Shanghai Comp +0.61%. The Bank of Japan, as largely expected kept its current pace of stimulus on hold at ¥80tn. It’s a quiet end to the week in the US this afternoon with just the December Kansas City Fed manufacturing index print due. Of more interest perhaps will be comments from the Fed’s Evans and Lacker who are due to speak this afternoon. Before this in Europe this morning we’ve got trade data due out for the Euro-area as well as PPI and consumer confidence prints due in Germany. In France we get manufacturing and business confidence and in Italy we receive industrial orders.