With less than two hours until the ECB unveils its first official quantitative easing program, the markets appear to be in a unchanged daze. Well, not all markets: the Japanese bond market overnight suffered its worst sell off in months on a jump in volume, although for context this means the 10Year dropping from 0.25% to 0.32%. Whether this is a hint of the "sell the news" that may follow Draghi's announcement is unclear, although Europe has seen comparable weakness across its bond space as well and the US 10 Year has sold off all the way to 1.91%, which is impressive considering it was trading under 1.80% just a few days ago. Stocks for now are largely unchanged with futures barely budging and tracking the USDJPY which after rising above 118 again overnight, has seen active selling ever since the close of the Japanese session.
Looking at the main event, today's start of debt monetization by the ECB in contravention to Article 123 (in Draghi's own words) [37], here is a concise summary from Deustche Bank's Jim Reid:
As we start a monumental day ahead with the ECB almost certain to announce QE - even if they are not yet fully ready to implement it - I can't help wondering what the date will be that we will be able to report that the ECB is out of the money printing game. Once they start it might be incredibly difficult to stop without a political accident on the negative side or a sustainable exogenous positive growth shock. If there is no political accident, will they still be buying bonds into the 2020s? Will they have bought other assets by then or will we have printed money to give directly to citizens before the next decade starts? When QE first started post crisis we felt money printing would be around for years and years. Several years later and we still can't see an end in sight even if the Fed is currently pausing and the SNB has shown that there is an alternative direction for some. So today likely starts a new chapter, even a new section of a book that is nowhere near finished.
A closer look at Asia's bourses shows the Nikkei 225 (+0.28%) remained relatively flat throughout the session amid light news flow and a light economic calendar. Elsewhere, both the Hang Seng (+0.7%) and Shanghai Comp (+0.6%) after the PBoC rolled-over CNY 269.5bln of lending facilities yesterday and today pumped CNY 50bln into money markets via 7-day reverse repos, with an aim to address Lunar New Year, IPO and Tax payment demands.
Looking at ground zero of today's action, European equities (Eurostoxx50 -0.18%) trade mixed with market participants side-lined ahead of the ECB rate decision, where the central bank are widely expected to announce the intricacies of QE, or, taking a page out of the OMT playbook, Draghi may simply reveal in broad strokes what ECB's QE will look like and withhold all details: after all it is not as if the ECB is not engaging in illegal state financing - why stop breaking the laws here? Bunds (-34 ticks) have seen a continuation of yesterday’s losses amid uncertainty on the size and scope of the QE program and the German curve is steeper in early trade; this comes as positions are squared ahead of the ECB meeting today at 1245GMT/1330CST and press conference at 1330GMT/0730CST. Furthermore, some analysts and traders are looking for a EUR >1trln QE program given the ECB sources yesterday suggesting that QE could begin in March through 2016 at EUR 50bln per month. However, the uncertainty in the market stems from the fact that the program could also be left open ended.
In FX, the USD-index (-0.02%) reversed the bid tone that was seen overnight, where the underperformers were AUD/USD and NZD/USD as they have retraced moves to the downside in today’s session. This overnight move lower was inspired by yesterday’s BoC surprise rate cut of 25bps which put the pair under selling pressure. However, in the European session AUD/USD trades back above the 1.1800 level. In other pairs, USD/JPY has been dragged lower by the weaker USD with movements in the FX markets particularly muted ahead of the of the ECB meeting.
Gold (-0.40%) prices remained below USD 1,300/oz after reaching 5 month highs yesterday ahead of the prospect of ECB QE. Elsewhere, WTI (USD +0.43) and Brent (USD +0.11) crude futures marginally higher despite the API’s showing a build of 5.7mln as the USD continues to weaken heading into the North American crossover. Looking ahead, sees the delayed release of the US DoE Crude Inventories scheduled today at 1600GMT/1000CST with analysts expecting a build of 2.7mlnbpd.
In summary: European shares mixed, off intraday highs, with the health care and food & beverage sectors underperforming and basic resources, oil & gas outperforming. ECB rate decision expected at 1:45pm CET (7:45am Eastern) with Draghi press conference outlining likely QE due 45 minutes later at 2:30pm. U.K. deficit widens more than forecast on EU contribution. The Swiss and German markets are the worst- performing larger bourses, the Italian the best. The euro is stronger against the dollar. Japanese 10yr bond yields rise; German yields increase. Commodities gain, with natural gas, nickel underperforming and Brent crude outperforming. U.S.
jobless claims, FHFA house price index, Kansas City Fed index due later.
Market Wrap
- S&P 500 futures up 0.1% to 2029
- Stoxx 600 down 0% to 358
- US 10Yr yield up 4bps to 1.91%
- German 10Yr yield up 3bps to 0.56%
- MSCI Asia Pacific up 0.1% to 139.8
- Gold spot down 0.5% to $1286.3/oz
- AVIC Said to Pursue Acquisition of U.S. Car-Parts Maker Henniges
- Shenzhen Government Said Seeking Investors for Kaisa Stakes
- Mitsubishi UFJ Said to Have Held Talks to Buy DZ Bank’s DVB
- Euro up 0.1% to $1.1622
- Dollar Index down 0.28% to 92.65
- Italian 10Yr yield up 1bps to 1.7%
- Spanish 10Yr yield up 1bps to 1.54%
- French 10Yr yield up 3bps to 0.73%
- S&P GSCI Index up 0.3% to 387.4
- Brent Futures up 0.9% to $49.5/bbl, WTI Futures up 0.3% to $47.9/bbl
- LME 3m Copper down 1.2% to $5700/MT
- LME 3m Nickel down 1.3% to $14825/MT
- Wheat futures up 0.5% to 539.5 USd/bu
Bulletin Headline Symmary from Bloomberg and RanSquawk
- Markets participants remain on the side-lines ahead of the ECB rate decision at 1245GMT/0645CST and press conference at 1330GMT/0730CST, expected to officially announce their sovereign bond buying programme.
- Looking ahead, sees the ECB rate decision & press conference, US Initial Jobless Claims, DoE Crude Inventories, and earnings from Verizon.
- Treasuries fall led by long end before ECB rate decision at 7:45am New York time, Draghi press conference at 8:30am; core EGB yields also rise as ECB president will probably commit to a QE program that may exceed EU1 trillion.
- Treasuries may continue falling as “‘buy the rumor, sell the fact’ becomes a reality” after ECB, ED&F Man head of rates and credit Tom Di Galoma writes in note; “The mere liquidation of Euro-govies should put downward pressure on core fixed income markets and enable US 10yr yields back to 2% at a minimum”
- ECB will have to win a battle for bonds to meet its balance- sheet target by buying sovereign debt as banks and pension funds are already competing with investors for a dwindling supply of German bunds
- ECB has approved an emergency funding line for Greek banks for 2 wks to be provided via the country’s central bank, Reuters reported, citing a person in banking familiar with the matter
- Starting with elections this Sunday in Greece and heading west to Ireland via Britain and Spain, polls show Europeans will vent their anger over issues from widening income disparities and record unemployment to unprecedented immigration
- Europe and Japan need to weaken their currencies further to help revive growth in their domestic economies, according to Ray Dalio, the U.S. hedge fund manager who runs the $160b Bridgewater Associates
- China’s commerce Ministry this week put forward a draft that could unify regulations overseeing foreign investment in China, scale back restrictions and begin regulating the variable interest entities that are commonly used to circumvent foreign-ownership limits
- The Shenzhen government is holding talks with several property developers in a bid to orchestrate investments in Kaisa Group Holdings Ltd., people familiar with the matter said today
- 83% of respondents to a Bloomberg Global Poll say the banking industry will continue cutting jobs this year; 61% say reductions will affect firms around the world, while 21% said most cuts will be in Europe and 1% said they’d be concentrated in the U.S.
- Sovereign yields mostly higher. Asian stocks gain; European stocks mostly higher, U.S. equity-index futures rise. WTI and Brent steady; copper and gold fall
US Event Calendar
- 8:30am: Initial Jobless Claims, Jan. 17, est. 300k (prior 316k)
- Continuing Claims, Jan. 10, est. 2.4m (prior 2.424m)
- 9:00am: FHFA House Price Index m/m, Nov., est. 0.3% (prior 0.6%)
- 9:45am: Bloomberg Consumer Comfort, Jan. 18 (prior 45.4)
- 11:00am: Kansas City Fed Manufac. Activity, Jan., est. 8 (prior 8)
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DB's Jim Ried concludes the overnight summary
As we start a monumental day ahead with the ECB almost certain to announce QE - even if they are not yet fully ready to implement it - I can't help wondering what the date will be that we will be able to report that the ECB is out of the money printing game. Once they start it might be incredibly difficult to stop without a political accident on the negative side or a sustainable exogenous positive growth shock. If there is no political accident, will they still be buying bonds into the 2020s? Will they have bought other assets by then or will we have printed money to give directly to citizens before the next decade starts? When QE first started post crisis we felt money printing would be around for years and years. Several years later and we still can't see an end in sight even if the Fed is currently pausing and the SNB has shown that there is an alternative direction for some. So today likely starts a new chapter, even a new section of a book that is nowhere near finished.
The fact that the FT, WSJ and Bloomberg all carried similar stories yesterday suggesting that the ECB are considering buying 50bn Euros a month over one to two years gave markets hope that there could be a positive surprise relative to numbers discussed in similar leaks over the last couple of weeks. If accurate this would put potential expansion at over a trillion, although we have to net off repayments. 10 days ago markets were starting to get concerned that there might be only consensus for a €500bn scheme. However before we get too excited this seems to be one of the proposals being considered by the council. It could be that they are also considering a smaller package.
If we do get a plan that makes the trillion euro expansion eminently reachable it will likely further support our 2015 view that European equities and credit will out-perform absolutely and also relative to the US where there is no QE at the moment. The equity trade could last all year but European credit is getting more and more expensive relative to US credit so at some point in 2015 (maybe when Oil stabilises and the Fed become more dovish) the US will likely out-perform on a carry basis alone. So timing is key here but we don't think its yet.
Yesterday our European economics team published a note briefly summarising their views on what will happen today along with their thoughts on what current market consensus is. The note came out before the aforementioned press articles hit the wires but they make some interesting points about the design. They are concerned that the complexity of QE design means there is a chance of delay and their baseline expectation is that the ECB sends a clear signal of imminent QE today – by announcing for example that there is ‚broad consensus? for it – but that the actual vote awaits the final design input from staff in March. The team go into details in terms of the type of plan they expect in the note. They do highlight that the main risk to their view is that a formal decision for QE is taken today. For us it seems inevitable that an announcement will be made today even if we don't get full details until March. So stand by for a big day.
In terms of market reaction yesterday, European equities closed firmer although the moves were perhaps more muted than we’d have expected given the news, perhaps reflecting that there could be other proposals being voted on outside the one the press all picked up on. Indeed, the Stoxx 600 and Dax finished +0.61% and +0.41% respectively for their fifth consecutive day of gains although admittedly the former did bounce some +1.4% off its intraday lows after the ECB leaks hit the wires. Credit markets were also supported, Crossover closing around 9bps tighter on the day. The Euro swung around over the day, reaching an intraday high of 1.168 versus the Dollar before settling at 1.155, still +0.6% firmer on the day. Before all this, sentiment was somewhat weaker in markets. The Stoxx at one point hit an intraday low of -0.8% after the ECB’s Nowotny urged investors not to focus too much on the ECB outcome. Specifically, Nowotny was reported on Reuters saying that ‘central bankers, banks and policy-makers should always have more of a relaxed attitude to news and not get too excited of news of one day’ before going on to say that ‘my plea is to look at the long term and not get carried away’. Government bond yields across Europe sold off through the session. 10yr yields in Germany (+7.5bps) and France (+5.7bps) closed higher and yields in the periphery finished up 1-2bps.
On the other side of the pond, the S&P 500 finished +0.47% at the close, recovering somewhat with the rebound in oil markets. Both WTI (+1.31%) and Brent (+2.17%) pared back some of the previous day’s losses to close at $47.78/bbl and $49.03./bbl respectively – both markets appear to have found something a $2 range for the time being with prices generally unchanged versus the start of last week. Energy stocks (+1.83%) led the recovery although in reality it was a better day for all sectors. Economic data largely took a backseat. A better than expected housing starts print (+4.4% mom vs. +1.2% expected) was offset by softer building permits (-1.9% mom vs. +0.8% expected).
Treasuries had a notably weak day yesterday as the flight-to-quality play somewhat unwound on the back of the firmer risk tone elsewhere. The 10y benchmark yield closed about 8bps higher at 1.872%. In reality it has been a somewhat volatile year but strong year for Treasuries so far with the 10yr reaching an intraday high of 2.21% on the first trading day of 2015 versus an intraday low of 1.69% last Friday.
Speaking of the rates rally one of the key outperformers yesterday was Canada. Indeed, the 25bps cut by the BoC to 0.75% (its first move in four years) caught the market by surprise which drove the 10yr Canadian government bond yields 5.4bps lower to an all-time low of 1.433%. Canadian equities also closed some 1.8% firmer on the back of the dovish stance. The BoC pointed towards the downside risks to inflation and financial stability as a result of the oil price shocks whilst the Canadian Association of Petroleum Producers yesterday also noted that capex in Western Canada could drop by as much as a third this year. What's more interesting for us though is the BoC move comes shortly after the recent surprise moves by the SNB, Danish and Indian Central Bank. These easing biases have also placed other DM central banks (eg RBA) somewhat under the spotlight. More importantly can the Fed still look to raise rates in a world where several central banks have already eased in 2015?
Indeed staying on this theme it was interesting to see that the minutes out of the Bank of England yesterday showed that two of the recent hawks who had previously called for the BoE to raise rates, switched their view to keeping rates unchanged. Yesterday’s data in the UK was largely mixed. Unemployment ticked down a notch to 5.8% (from 6%) however wage growth disappointed with underlying wages falling 0.2% mom. As a result of the mixed data and change of view from two recent hawks, DB’s George Buckley noted that he sees the BoE pushing the first rate hike out to May next year. George doesn’t expect the Bank to look through the weak (and what should continue to be) headline inflation.
Refreshing our screens this morning Asian equities are mostly trading on a firmer tone helped by the positive US lead yesterday. Bourses in Hong Kong and Australia are up +0.69% and +0.49% respectively whilst Korea is flat, as we go to print. The CSI 300 (+0.16%) and Shanghai Composite (+0.08%) have pared back initial losses after reassurances from Premier Li about the growth slowdown at Davos. The Premier said that China will still face large downward pressures in 2015 but won't have systemic financial risks and will seek to improve the quality of growth. The liquidity situation is also a little bit better on shore with the PBOC conducting reverse repo for the first time this year (RMB50bn via 7-day repo overnight). Similarly Asian credit markets are also trading on a stronger footing overnight with IG spreads generically 2-3bps tighter. New issues are also breaking inside re-offer after a hiatus of a couple days although they are still dominated by IG issuers so far. On the FX front the EUR is trading near its 11-year low overnight (1.159) ahead of the ECB meeting later today.
In terms of the day ahead data watchers can expect Italian industrial orders and retail sales, Spanish unemployment as well as public finance data from the UK. US jobless claims today will cover the period for January’s nonfarm payrolls. We also have the FHFA house price index and Kansas City Fed manufacturing index in the US today but all these will be secondary as all eyes will on ECB and Draghi today.
