One day after the SNB stunner roiled markets, overnight global markets have seen - as expected - substanial downward pressure, with the Swiss market slide resuming post open, while European stocks have seen some pressure despite what is now an assured ECB QE announcement next week. However, the one trade that can not be mistaken is the global rush into the safety of government paper, with every single treasury yielding less today than yesterday (the Swiss 10Y was trading below 0% at last check), except for Greek 10Y which are wider on deposit run fears. That said, with capital market liquidity absolutely non-existent even the smallest trade has a disproportionate effect on futures, and expect to see much more rangebound trading until the damage report from the SNB action is fully digested, something which will take place over the weekend.
The problem is that even if Central Banks manage to stabilize markets today, and by now there is no doubt that only central banks are left trading with themselves, retail investors may no longer care especially in the aftermath of the overnight FX bloodbath which has seen countless FX brokers shut down as their balance sheet was unable to withstand the stress from the SNB action, and as reported earlier, Alpari U.K. limited says it has entered insolvency; FXCM, the largest U.S. retail foreign-exchange brokerage, said client debts threatened its compliance with capital rules and a New Zealand-based dealer went out of business. In other words, it will take a long time to evaluate just how massive the fallout from SNB has been, before any sort of direction to the markets can resume.
Over in Asia, the SNB’s surprise decision to eliminate its EUR/CHF 1.20 floor dampened risk appetite sending the Nikkei 225 (-1.4%) to levels last seen on October 31st, the day that the BoJ expanded QQE. Elsewhere, the Shanghai Comp (+1.2%) bucked the trend extending on yesterday’s gains and is now on course for a 10th consecutive week of gains, the longest streak since May 2007. This follows Thursday’s data showing FY14 Chinese New CNY loans at a record high, a sign monetary conditions are loosening in the region and also the PBoC expanding its relending quota by CNY 50bln to support agriculture and small companies.
In Europe, following on from yesterday’s surprise SNB move, the SMI (-5.7%) continues to underperform as Swiss exporters and banks come under considerable pressure following the stronger CHF. The fallout continues today with retail brokers Alpari entering insolvency, FXCM breach their capital requirements with a USD 225mln hold and many others feeling the pain. Core European equity markets are all in the red (Eurostoxx50 -0.35%) but prices have been propped up by dovish comments from ECB’s Coeure who provided some further insight into the main event next week and said that in order for QE to be efficient, 'it would have to be big'. This did help German 10y yields reach new record lows of 0.436%.
In FX, the EUR/CHF was under selling pressure as Asian entrants digested the SNB surprise decision drifting below parity once again however, EUR/CHF has since pared the earlier weakness lifting the cross back above parity. Poor liquidity is leading to very choppy trade conditions in all currencies and many traders are sitting on the side-lines after nursing losses yesterday. Elsewhere, EUR/USD continued its downward trend and broke below 1.16 as EUR/GBP printed fresh lows in the backdrop of very thin liquidity post-SNB. Separately, the NOK has seen some minor strength as Norway's Jensen (Fin. Min.) and Olsen (Norges Gov.) sound upbeat over the Norwegian economy as there were some outside market bets that the Norges Bank may change policy given the SNB yesterday and ECB next week and the upbeat discussions offer no hints of any easing of policy.
Bucking the trend if only for the time being, is oil, with WTI and Brent crude futures extend on gains as they both trade higher by over USD 1.00 on nothing fundamental, however, the EIA cut their 2015 non-OPEC estimate and said that the rebalancing of the oil market may happen in the H2 of this year as demand comes back. Furthermore, the WTI/Brent crude spread has widened to USD 1.91 after they briefly traded below parity on Tuesday. Gold continues to trade above its 200DMA after breaking it on safe haven bids yesterday on track for its largest weekly gains in 11 months.
In Summary: European shares advance, near session high, with the oil & gas, basic resources sectors outperforming and construction and travel & leisure underperforming. Swiss market drops for a second day, Swiss 10-year yield drops below zero for first time. Franc weakens ~4.2% to 1.0179 per euro after ~23% rise yesterday. Most European bonds yields fall, Greek bond yields rise. Greek lenders request emergency liquidity as deposit outflows increase. Crude oil gains, IEA sees oil-price recovery, cuts 2015 non-OPEC output estimate. The Swiss and U.K markets are the worst-performing larger bourses, the Italian the best. The euro is weaker against the dollar. Commodities gain, with natural gas, gold underperforming and Brent crude outperforming. U.S. CPI, industrial production, capacity utilization, Michigan confidence due later.
Market Wrap:
- S&P 500 futures unchanged at 1986.5
- Stoxx 600 up 0.3% to 349.4
- US 10Yr yield up 1bps to 1.72%
- German 10Yr yield down 3bps to 0.45%
- MSCI Asia Pacific down 0.6% to 138
- Gold spot down 0.3% to $1258.5/oz
- Euro down 0.35% to $1.1592
- Dollar Index up 0.12% to 92.47
- Italian 10Yr yield down 5bps to 1.69%
- Spanish 10Yr yield down 5bps to 1.54%
- French 10Yr yield down 5bps to 0.63%
- S&P GSCI Index up 1% to 386.7
- Brent Futures up 2.4% to $49.4/bbl, WTI Futures up 1.9% to $47.1/bbl
- LME 3m Copper up 0.6% to $5663/MT
- LME 3m Nickel up 0.6% to $14556/MT
- Wheat futures up 1% to 538 USd/bu
Bulletin headline summary from RanSquawk and Bloomberg
- Following, the removal of the EUR/CHF floor the SMI continues to underperform in Europe, although comments from ECB’s Coeure capped some of the weakness seen in European equities.
- Looking ahead US CPI, US IP and Michigan are all due later today alongside comments from Fed's Kocherlakota, Williams (voter), Bullard and large cap earnings from Goldman Sachs, Charles Schwab and PNC Financial Services Group.
- Treasury yields rise overnight before today’s release of Dec. CPI; yesterday saw 2Y and 3Y yields close at lowest levels since October, 5Y lowest since June 2013, 10Y lowest since May 2013, 30Y record low 2.397%.
- Bonds around the world extended their record-setting rally this year as Switzerland’s unexpected decision to abandon its currency cap and make interest rates even more negative drove demand for the safest assets
- Gold futures declined for the first time in six days on speculation that prices advanced too fast after the Swiss National Bank unexpectedly scrapped its euro currency cap
- The ECB is studying the experiences of the U.S. and Britain with QE to decide what volume of bonds it may buy as part of its own program, an executive board member said
- Two Greek lenders are seeking to borrow from the nation’s central bank emergency line, a sign banks may be struggling to fund their activities amid an outflow of deposits
- Oil advanced in New York, paring an eighth weekly decline, as the International Energy Agency lowered forecasts for supplies from outside OPEC and said prices could recover
- Losses mounted from the Swiss currency shock as the largest U.S. retail FX brokerage said client debts threatened its compliance with capital rules, a dealer in New Zealand went out of business and a British broker said it was insolvent
- Russian net capital outflows probably doubled last year and the government may resort to currency restrictions if the pace doesn’t ease in 2015, according to a Bloomberg survey of economists
- Belgian police said they killed two terrorists and foiled a “major” attack as security forces across Europe swooped on suspected Islamist cells amid heightened alert after last week’s massacre in France
- Sovereign 10Y yields lower except Greece which is ~45bps higher. Asian stocks drop; European stocks mostly lower, U.S. equity-index futures decline. Crude higher; copper and gold rise
US Event Calendar
- 8:30am: CPI m/m, Dec., est -0.4% (prior -0.3%)
- CPI y/y, Dec., est. 0.7% (prior 1.3%)
- CPI Ex Food and Energy m/m, Dec., est. 0.1% (prior 0.1%)
- CPI Ex Food and Energy y/y, Dec., est. 1.7% (prior 1.7%)
- CPI Core Index SA, Dec., est. 239.635 (prior 239.332)
- 9:15am: Industrial Production m/m, Dec., est. -0.1% (prior 1.3%)
- Capacity Utilization, Dec., est. 79.9% (prior 80.1%)
- 10:00am: U. of Mich. Sentiment, Jan. preliminary, est. 94.1 (prior 93.6)
- 4:00pm: Total Net TIC Flows, Nov. (prior $178.4b); Net Long-term TIC Flows, Nov. (prior -$1.4b)
DB's Jim Reid concludes the overnight recap
In terms of the wider market impact yesterday in Europe, there were contrasting moves between Swiss equities and the wider European market. With regards to the former, the SMI (-8.67%) closed sharply lower. Swatch (-16.5%), UBS (-11.1%) and Holcim (-11.0%) in particular were notable decliners with Reuters quoting Swatch’s CEO saying that the moves in the currency is an economic ‘tsunami’ for Switzerland. Outside of Switzerland, European equities did well with both the Stoxx 600 (+2.58%) and Dax (+2.20%) rallying as markets appeared to lean on the hope that the SNB move was a hint that we are getting a larger move from the ECB soon. Credit markets also closed firmer with Crossover finishing 11bps tighter.
There was a significant tightening in short end bond yields too. Swiss bonds rallied across the curve, led by 2y yields which closed 17.3bps tighter at -0.528%. All Swiss government bonds up to 8-years in maturity are now trading in negative territory, with 10y yields at just 0.044%. Elsewhere 2y Bunds moved further into negative territory and extended record lows, closing 2.4bps tighter at -0.144%. In fact, 8 European countries now have negative 2y yields whilst yesterday's tightening in 5y Dutch bonds saw them join Finland, Germany and Switzerland with as countries with negative 5y yields. Data took something of a backseat in Europe yesterday with the 2014 German GDP print coming in as expected at +1.5%, our European colleague noting that the reading implies that Germany returned to growth in Q4.
All in all our view that Euro equities might out-perform US equities in 2015 got a boost as Europe had a good day but the US struggled as equities and credit sold off further whilst the weaker tone continued to lend a firm bid to Treasuries with yields taking a sharp leg lower. The -0.92% close in the S&P 500 extended the run of consecutive declines to five days now (8 out of 10 in 2015), taking the index back down to the lowest level since December 16th. Credit too sold off, IG23 finishing 1.6bps wider. As mentioned earlier, yesterdays volatility in oil markets didn’t help with energy stocks closing -1.21% lower and US HY energy names widening a further +6bps after both WTI (-4.60%) and Brent (-3.19%) closed lower at $46.25/bbl and $48.27/bbl respectively. Banks (-2.58%), however led declines for equity markets after both Bank of America and Citigroup reported somewhat subdued earnings. Interestingly, we also had the previously flagged Q4 earnings from the major oil-services company Schlumberger after market close. Unsurprisingly the headlines looked weak with the company taking a $1.7bn charge over the quarter as well as announcing that it’s to cut 9,000 jobs, roughly 7% of the workforce. Expect to see similar headlines from energy names as we move through the earnings season.
Back to fixed income markets, yesterday’s rally in US Treasuries saw the benchmark 10y yield rally 14bps to finish at 1.715%, rallying for the fifth straight day. The demand for Treasuries has seen the 10y yield now tighten 45bps already through 2015. 30y yields also hit fresh record lows, closing 10.1bps tighter at 2.368%. Gold too had a strong day, closing 2.77% higher to its highest level since September at $1262/oz. Data was generally mixed. Although the Empire Manufacturing print improved 11pts to 9.95 in January, the Philadelphia Fed survey painted a more subdued outlook with the index falling 18pts to 6.3. Elsewhere jobless claims climbed to 316k, back above 300k for the first time in seven weeks. Finally PPI was modestly better than expected with both the headline (-0.3% mom vs. -0.4% expected) and core (+0.3% vs. +0.1% expected) trending better. With much of the focus on the SNB, comments from the Fed’s Rosengren in the WSJ saying that he is ‘not particularly confident’ that inflation will move back towards 2% and instead urging patience on lift-off appeared to fly under the radar somewhat. Specifically, Rosengren also went on to say that ‘if we don’t see any evidence in wage and price data for a year, then I’d wait a year before I’d do something’.
Refreshing our screens quickly this morning, Asian equities are following the US lead and are trading lower as we type. The Nikkei (-1.85%), Hang Seng (-0.76%), ASX (-0.60%) and Kospi (-1.46%) are all lower although Chinese equities (+1.13%) continue to move higher. Bond yields across the region are grinding tighter however, with 10y JGB’s trading as low as 0.219% at one stage whilst 10y yields in Australia are 13bps lower.
In terms of today’s calendar, much of the attention this morning will be on the final inflation print in Germany as well as the Euro-area CPI number later. Across the pond this afternoon, focus will be on the December CPI print in the US with the market looking for -0.4% mom with energy driving the headline print. The core print however is expected to rise +0.1% mom which would result in a +1.7% annualized rate. Elsewhere this afternoon, industrial and manufacturing production, capacity utilization and the University of Michigan survey are due. On top of this we are expecting comments out of the Fed’s Kocherlakota, Williams and Lockhart - so a busy day all round.
