After yesterday's FOMC Minutes, despite a huge dovish reversal by the Fed - one which increasingly puts its "credibility" and reputation at risk - stocks were unable to close green, or even above 2100, for one simple reason: uncertainty with the fate of Greece. Overnight there has not been much more clarity, when as previously reported Greece submitted a 6 month extension request to its master loan agreement but not to its bailout extension, a nuance lost in the annals of diplomacy. But is this the much-awaited Greek capitulation? Or will the Eurogroup reject this too? The answer may be available in a few hours after an emergency Eurogroup meeting due later today. However, as usual stocks are ready to "price in" yet another Greek conflict resolution, and after futures were lower by 7 points overnight, were up 4 points at last check: a rebound which will not correct if the latest Greek "compromise" fails to deliver.
So as we wait for the answer, and as stocks eager to see a favorable outcome, one thing that is not waiting if oil, which after yesterday's record API inventory build, has finally realized that plunging rig counts do not mean a decline in production - in fact, quite the opposite - and is flirting with the $50 price, threatening with breaching it to the downside.
European equities opened in minor negative territory, thus shrugging off the overtly dovish FOMC Minutes release which revealed numerous members were in favour of keeping rates on hold for longer and cautious over removing the ‘patient’ phrase. Instead European equities were led lower by the fall in energy prices after yesterday’s API inventories. Note that stocks saw a leg lower around 0730GMT which coincided with reports in FAZ that the ECB would like Greek capital controls. However, the move lower was not attributed to the story with fixed income and FX markets relatively unphased by news. Furthermore, the downtick in the DAX was more technically driven on the break of lows printed in yesterday’s afternoon session. Additionally, these reports were later denied by the ECB, upon which there was no market reaction. Nonetheless, despite opening lower, European equities have pulled away from their worst levels with little in the way of fresh newsflow, while Bunds have held onto their initial gains. In terms of Greek assets, the ASE has fluctuated between gains and losses while the 3yr yield is higher circa 75bps as fears for the nation continue to linger.
Overnight, the Nikkei 225 (+0.4%) surged to close at its highest level since the May 2000 following yesterday’s FOMC minutes, with participants shrugging off a slightly stronger JPY. ASX 200 was dragged lower by energy names after WTI fell as much as 3.7%. Chinese, Hong Kong, South Korean, Taiwanese and Singapore stock markets were closed today due to the Lunar New Year. JGBs trade up 26 ticks underpinned by yesterday’s post-FOMC spill-over buying in USTs.
In FX markets, USD was initially broadly weaker against its major counterparts in the wake of the dovish FOMC minutes release. GBP also saw a bout of underperformance in early trade following some dovish comments by BoE-Hawk McCafferty who said the level of current GBP appreciation is slightly uncomfortable and is an issue that should be monitored, adding it is better to hold interest rates at current levels for a little bit longer. The broadly weaker GBP saw EUR/GBP test 0.7400 to the upside thus providing a further boost to EUR/USD. Elsewhere, overnight AUD came under selling pressure sending AUD/NZD to a fresh record low, after S&P said the Australian budget, due in May 2015, would be vulnerable to risk overseas which could risk the country's AAA rating. Heading into the North American crossover, EUR/CHF saw a bout of strength with the being attributed to potential SNB intervention in lieu of the comments from SNB’s Jordan a few days ago. This subsequently supported USD/CHF and saw the USD-index return to relatively unchanged territory.
Price action for the energy complex has largely been dictated by last night’s API inventory report rather than the FOMC minutes. The report revealed a 6th consecutive build in stockpiles (+14300k vs. Prev. +1600k). This comes ahead of today’s DOE inventory data expected to show a build of 3000k vs. Prev. 4868k. In terms of price action, WTI has come off its worst levels after failing to make a sustained break below the key psychological USD 50/bbl. Nonetheless, precious metals markets have continued to remain at their best levels, with prices underpinned by the FOMC-inspired USD weakness, while Copper saw subdued trade overnight amid a lack of participants in the markets amid a number of market closures across the region due to the Lunar New Year. CME lowered Henry Hub (NN) initial margins for specs by 16.9% to USD 880/contract from USD 1,059; raised RBOB Gasoline futures (RB) initial margins for specs by 4.2% to USD 5,500/contract from USD 5,280. (CME)
European shares little changed, having risen from earlier losses, with the personal & household and autos sectors outperforming and oil & gas, basic resources underperforming. Greece submitted a request to its euro-area creditors to extend the availability of bailout funds for six months. ECB increased ELA for Greek banks to EU68.3b from EU65b yesterday, to publish a summary of its monetary-policy meeting for the first time today. Leaders of France, Germany, Russia and Ukraine agreed to stand by Minsk agreement despite breach of the cease-fire in Debaltseve. Fed signaled its willingness to keep interest rates near zero for longer in FOMC minutes released Wednesday. The Swiss and French markets are the best-performing larger bourses, U.K. the worst. The euro is little changed against the dollar. Japanese 10yr bond yields fall; Italian yields decline. Commodities decline, with WTI crude, Brent crude underperforming and natural gas outperforming. * U.S. jobless claims, Philadelphia Fed index, leading index due later.
Market Wrap
- S&P 500 futures up 0.1% to 2097
- Stoxx 600 up 0.1% to 380.7
- US 10Yr yield unchanged at 2.09%
- German 10Yr yield down 1bps to 0.37%
- MSCI Asia Pacific up 0.3% to 144.7
- Gold spot up 0.5% to $1218.2/oz
- Euro little changed at $1.1392
- Dollar Index down 0.01% to 94.19
- Italian 10Yr yield down 5bps to 1.57%
- Spanish 10Yr yield down 5bps to 1.53%
- French 10Yr yield down 1bps to 0.68%
- S&P GSCI Index down 1.8% to 413.2
- Brent Futures down 2.7% to $58.9/bbl, WTI Futures down 4.2% to $50/bbl
- LME 3m Copper down 0.3% to $5730/MT
- LME 3m Nickel down 2% to $13965/MT
- Wheat futures down 0.8% to 519.8 USd/bu
Bulleting Headline Summary From Bloomberg and RanSquawk
- European equities initially chose to focus on lower energy prices rather than FOMC minutes before pulling off their worst levels amid no fundamental news
- The ECB have denied reports by German newspaper FAZ that the central bank would favour imposing capital controls on Greece
- Today sees the release of the first ever ECB minutes, as well as data from the US, including weekly jobs data, Philly Fed Business outlook, EIA natural gas storage change, DoE inventories and earnings from Wal-Ma
- Treasuries 10Y and longer extend gains seen yesterday after Jan. FOMC minutes said many officials were inclined to keep fed funds rate at zero longer to offset risks to economy.
- Minutes suggest Fed uncertain about raising rates prematurely, removing “patient” from guidance, based on published research
- ECB will today publish a summary of its monetary-policy meeting for the first time, which should make interesting reading as it’ll cover the Jan. 22
deliberations behind the central bank’s controversial choice to start QE - Greece’s government submitted a request to its euro-area creditors to extend the availability of bailout funds for six months in a last-ditch effort to avert a cash crunch
- The ECB said reports that its Governing Council discussed capital controls in Greece at Feb. 18 meeting were “incorrect”; Kathimerini reported ECB rejected Greece’s request to auction EU5b in additional t-bills
- The biggest buyout fund in the Nordic region says an unprecedented era of monetary stimulus is inflating asset prices across markets to extreme levels, with history offering little help in predicting how it will all end
- Any sharp gains in the krona would mean “more or less game over,” making it impossible for Swedish policy makers to jolt the economy out a deflationary spiral, Riksbank Deputy Governor Per Jansson said
- Fighting continued in eastern Ukraine after government troops relinquished a strategic crossroad town and the country’s leader called for the deployment of UN
peacekeepers to safeguard a fragile truce - North Korean leader Kim Jong Un has signaled he may further purge top cadres, ordering senior Workers’ Party members to carry out a “campaign against abuse of power, bureaucratism, irregularities and corruption”
- Obama, who has come under criticism from Republicans who say he avoids acknowledging the Muslim roots of extremist groups, said terrorists use religion as a recruiting tool by portraying the U.S. and European nations as being at war with Islam
- Sovereign yields fall. Asian, European stocks gain; U.S. equity-index futures lower. Brent and WTI fall, gold gains, copper declines
US Event Calendar
- 8:30am: Initial Jobless Claims, Feb. 14, est. 290k (prior 304k); Continuing Claims, Feb. 7, est. 2.360m (prior 2.354m)
- 10:00am: Philadelphia Fed Business Outlook, Feb., est. 9.0 (prior 6.3)
- 10:00am: Leading Index, Jan., est. 0.3% (prior 0.5%)
DB's Jim Reid concludes the overnight recap
The Fed decided to keep hold of its crutches for a bit longer last night in what at face value looked a dovish set of minutes. However the level of dovishness probably depends on whether you think the statement would have been much different had the committee seen the most recent strong employment report when they met back in late January. With 38 countries having eased so far in 2015 (many a surprise) and with inflation so low we think the Fed have to tread carefully even if employment numbers are decent.
In terms of the details, much of the focus for markets was on the text concerning that Fed officials ‘indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time’. Concerning the inflation outlook, there was some focus from officials that ‘the continuing weakness of core inflation measures as a concern’ as well as some emphasis on further near term disinflationary pressures from falling oil prices but the longer term inflation outlook essentially remained the same with the FOMC still seeing a gradual rise to its 2% target. For us however, attention was on any forward guidance particularly as some sort of pre-requisite to Yellen’s upcoming Humphrey-Hawkins speech. There were perhaps some clues from the text. Specifically the minutes cited that ‘many participants regarded dropping the ‘patient’ language in the statement, whenever that might occur, as risking a shift in market expectations for the beginning of policy firming toward an unduly narrow range of dates’ and that ‘some expressed concern that financial markets might overreact’. Perhaps a signal that it’s easier to keep the ‘patience’ language for now as a means of flexibility? For us we've always felt it might be a struggle for the Fed to raise rates in 2015 however there is no doubt the Fed want to raise in June but that they also want to keep flexible with a lot going on macro wise. So it remains difficult to pre-judge and continues to be data dependant and event driven. If the data isn't there in inflation terms will they really make a pre-emptive strike in the summer? The only reason for doing so in our opinion if this is the case is a belated (possibly by two decades) attempt to avert more bubbles and moral hazard.
Moving on, it’s a bit of a relief that it’s taken 526 words before we mention Greece today but after a quieter 24 hours the clock ticks closer to midnight. The anticipated request for a 6-month loan extension was said to be postponed to today. It’s not entirely clear why the request was delayed however it didn’t appear to upset markets with risk assets in Europe in particular having a stronger day – which we’ll touch upon later. Clearly some of the debate remains in the actual substance of the proposal which will ultimately decide which way we go on Friday. German finance minister Schaeuble maintained his stance on the situation, quoted on Reuters as saying that ‘our room for maneuver is limited’ and that ‘we must keep in mind that we have a huge responsibility to keep Europe stable’. Greek finance minister Varoufakis meanwhile said that ‘the application will be written in such a way so that it will satisfy both the Greek side and the president of the Eurogroup’.
Yesterday we also got news that the ECB had approved an increase in the ELA facility. The facility has now been increased to €68.3bn, from €65bn. Although this is likely to relieve some short term pressure for Greek banks, it of course highlights the further pressure from deposit outflows. Although there was no statement from the ECB side, the incremental small increase does perhaps show how officials are using the tool to keep the pressure on Greece and somewhat force them to come forward with a proposal to satisfy Europe. Previous reports in Greek press Ekathimerini suggested that the Bank of Greece had demanded for the facility to be increased by €10bn. In terms of market reaction yesterday, in the US the S&P 500 closed more or less unchanged (-0.03%) having pared losses of as much as -0.4% pre-FOMC release. Treasuries meanwhile closed notably firmer following the minutes. The benchmark 10y yield finished 5.8bps lower at 2.08% with the bulk of the rally coming post minutes. It was a similar pattern for the Dollar. The DXY had previously traded as much as +0.5% higher in the run up to the release, before giving up all of the gains more or less to finish just +0.05%. A decline in oil prices and softer data in the US had previously weighed on markets before the release of the minutes. Energy stocks (-1.46%) dragged the S&P 500 lower as WTI (-2.60%) and Brent (-3.20%) fell to $52.14/bbl and $60.53/bbl respectively. Meanwhile, data yesterday was softer. Both housing starts (-2.0% mom vs. -1.7% expected) and building permits (-0.7% mom vs. +0.9% expected) printed below expectations. PPI was also weaker with the headline reading coming in below consensus (0.0% yoy vs. +0.3% expected) and down from +1.1% previously and the core print (ex. food and energy) also surprising to the downside (+1.6% yoy vs. 2.0% expected). Both manufacturing (+0.2% mom vs. +0.4% expected) and industrial production (+0.2% mom vs. +0.3%) also came in below consensus whilst capacity utilization for January was unchanged at 79.4%.
In terms of price action in Europe yesterday, as mentioned the delay in the Greece proposal did little to dampen sentiment as the Stoxx 600 finished +0.89%, the DAX (+0.60%), with the CAC (+0.95%) also firming. Greek equities (+1.06%) also closed higher and 3y yields finished around 116bps tighter. The Euro closed 0.12% weaker versus the Dollar at $1.1397 although had traded as low as $1.133 pre-FOMC. It was a stronger day for credit markets too as Crossover ended 14bps tighter. The latest on Ukraine meanwhile are reports on Bloomberg that Ukrainian PM Poroshenko has asked for UN peacemakers to be deployed across the front-line and rebel controlled areas of Ukraine as the conflict continues.
In the UK yesterday Gilt yields rose following the release of the BoE minutes and better than expected employment data. The benchmark 10y yield finished nearly 9bps higher at 1.848% after the minutes showed something of a desire to ‘return inflation to the target as quickly as possible after the effects of energy and food prices movements had abated’. The minutes also noted that ‘in practice, this means that the committee would seek to set monetary policy so that it was likely that inflation would return to the 2% target within two years’. Members voted unanimously for keeping rates on hold, however two members did say that the decision was ‘finely balanced’. The Pound closed +0.53% versus the Dollar yesterday. Elsewhere, data released yesterday in the UK showed that unemployment ticked down one-tenth to 5.7% yoy in December, whilst average weekly earnings rose to +2.1% yoy from +1.8% - however excluding bonuses, weekly earnings actually dropped one-tenth to 1.7% yoy.
Refreshing our screens this morning, it’s a fairly quiet day in Asia with a number of markets closed for holidays, however in Japan the Nikkei (+0.38%) and Topix (+0.80%) are both trading firmer. Oil markets have also extended their declines this morning with both WTI and Brent trading 2-3% lower. It appears the latest decline is ahead of expectations that the latest EIA data will show US crude stockpiles at record levels. In terms of the day ahead, we kick off this morning in Europe with French CPI data along with UK CBI business trends followed later by Euro-area consumer confidence. In the US this afternoon, we’ve got jobless claims and the Philadelphia Fed business outlook to look forward to.