With little newsflow out of Europe, and just as little on deck out of the US (just NY ISM and auto sales later today), the main overnight events were out of Asia where first the RBA decided to leave rates unchanged (despite the majority calling for a rate cut) when as Bloomberg's Richard Breslow noted, in the RBA communique the central bank "changed their reference to China from “China’s growth was in line with expectations” to “China’s growth will slow a little from last year’s outcome.” Whatever may be happening with China, one thing is clear - either the RBA announcement was leaked a minute early, or HFT algos took a huge gamble and soared higher up to a minute earlier (more shortly).
Speaking of China, the rate-cut euphoria lasted just one day, and after a feeble 0.8% bounce on Monday, the SHCOMP was down 2.2% this morning over fears the PBOC is doing too little, too late to halt what is now perceived by many as a massive "tightening" capital flight out of China. Finally, Japan made the newsflow, after it JGBs continued to slide following a weak auction, fears that the BOJ is done easing after Abe advisor Etsuro Honda warned against overheating, and after the biggest jump in base pay in over a decade led some to think the BOJ may soon have to halt easing altogether, especially if real wages proceed to rise.
Another notable development is the ongoing weakness in US rates even as the ECB-buying backstop has made selling of rates in Europe virtually illegal. The weakness in the US 10Y however can be almost entirely attributed to the "mammoth" Actavis-Allergan issue, which is now said to be more than 4x oversubscribed, with nearly $90 billion in orders for just over $20 billion in paper. The result is weakness for matched Treasurys due to rate locks: as InTouch David Fuller's writes watch for “late rate lock unwinds into/out of pricing” though it depends on how big rate lock was Feb. 26 and “whether end-users buy it outright or vs USTs." Once this latest mega issue is absorbed expect the convergence trade to resume.
Wrapping up the key moves, the dollar index rose modestly to 95.53 this morning, hitting the highest since 2003, as further easing pressure builds on banks around the world as the US marches along to what is seen by many as a de minimus rate hike come hell, high water, or any economic data whatsoever.
European equities currently reside in modest positive territory in what has been yet another session so far which has been relatively void of pertinent newsflow from the Eurozone. On a sector specific basis, financial names have been placed under some minor pressure in the wake of Barclay’s (-2.8%) pre-market report whereby the Co. increased their provisions for the FX probe by GBP 500mln and said they could not be certain over whether they would need to set aside further provisions. From a fixed income perspective, Bunds initially saw a subdued first half of the session in tandem with the rangebound performance seen across European equities with participants still monitoring the ongoing negotiations between Greece and their Eurozone counterparts with European Commission President Juncker suggesting that a third bailout for Greece has not been discussed. Heading into the North American crossover, Bunds and USTs saw a modest downtick with volumes in the Bund rolling from the March contract to June, while Finland has also opened books on its EUR 3bln 2031 offering. Additionally, Actavis' mammoth nine-part offering is expected to be priced today, with the size of the issuance expected to be in excess of USD 22bln. Note, this placed downward pressure on USTs heading into the close yesterday.
In FX markets, AUD has managed to hold onto its gains seen overnight after the RBA unexpectedly left its Cash Rate Target steady at 2.25%. Nonetheless, the central bank also signalled further easing by saying it may be appropriate over the period ahead, which capped further AUD gains. Elsewhere, USD-index has recovered off its worst levels amid no fundamental news, although USD/JPY remains in negative territory following comments from Japanese PM Advisor Honda who also said current USD/JPY levels are a kind of an upper limit in the exchange rate’s comfort zone. GBP was granted a brief spell of reprieve following the latest UK construction PMI reading which exceeded expectations (60.1 vs. Exp. 59.1), however, GBP remains relatively unchanged against the Greenback.
In the commodity complex, spot gold resides in modest positive territory, reversing some of the losses seen during yesterday’s session alongside the strength in US equities. Elsewhere, Copper prices pulled further back from their 7-week highs as Chinese risk sentiment was dampened on IPO concerns after China’s securities regulator approved 24 IPO’s which could lock up a record value of CNY 3trl. In energy markets, both Brent and WTI crude futures trade in the green ahead of the after-market API inventory release with energy newsflow overall relatively light.
In summary: European shares remain higher, though off intraday highs, with the food & beverage and personal & household sectors outperforming and financial services, banks underperforming. RBA leaves rates unchanged, Australian dollar rises. Swiss economy grew faster than forecast before franc cap removal. The French and Italian markets are the best-performing larger bourses, Swedish the worst. The euro is weaker against the dollar. Japanese 10yr bond yields rise; French yields increase. Commodities gain, with natural gas, copper underperforming and Brent crude outperforming. U.S. ISM New York, vehicle sales, IBD/TIPP economic optimism, due later.
Market Wrap
- S&P 500 futures down 0.1% to 2112.5
- Stoxx 600 up 0.2% to 392.2
- US 10Yr yield up 2bps to 2.1%
- German 10Yr yield up 1bps to 0.37%
- MSCI Asia Pacific up 0.1% to 146.3
- Gold spot up 0.1% to $1208.2/oz
- 56% of Stoxx 600 members gain, 42% decline
- Eurostoxx 50 +0.2%, FTSE 100 +0.1%, CAC 40 +0.3%, DAX +0.2%, IBEX -0.1%, FTSEMIB +0.2%, SMI -0.1%
- Asian stocks little changed with the Sensex outperforming and the Shanghai Composite underperforming.
- MSCI Asia Pacific up 0.1% to 146.3
- Nikkei 225 down 0.1%, Hang Seng down 0.7%, Kospi up 0.2%, Shanghai Composite down 2.2%, ASX down 0.4%, Sensex up 0.5%
- Euro down 0.13% to $1.117
- Dollar Index up 0.03% to 95.49
- Italian 10Yr yield up 0bps to 1.35%
- Spanish 10Yr yield down 0bps to 1.35%
- French 10Yr yield up 2bps to 0.66%
- S&P GSCI Index up 0.8% to 416.4
- Brent Futures up 2.1% to $60.8/bbl, WTI Futures up 1.5% to $50.3/bbl
- LME 3m Copper down 0.9% to $5850/MT
- LME 3m Nickel down 0.8% to $13740/MT
- Wheat futures up 0.3% to 501.3 USd/bu
Bulletin Headline Summary From RanSquawk and Bloomberg
- European newsflow is relatively quiet so far with participants now awaiting the US’ arrival to the market
- AUD manages to hold onto its overnight gains after the RBA refrained from cutting rates, although warned that further easing may be appropriate over the period ahead
- Looking ahead, today sees the release of Canadian GDP at 1330GMT/0730CST
- Treasuries extend yesterday’s decline before Actavis prices 9-part deal that could be second-largest on record; market focus also on Friday’s payrolls and average hour earnings data.
- Order book for Actavis deal said to be around $90b; pricing expected today
- Global banks are EU305b ($341b) short of a target for easy-to-sell assets intended to prevent another financial crisis, according to the latest data from the Basel Committee on Banking Supervision; LCR takes full effect in 2019
- Draghi will have an opportunity at ECB meeting Thursday to add to details of the EU1.1t QE plan announced in January; will also unveil the ECB’s first growth and inflation forecasts for 2017, numbers that will have significance for program’s duration
- ECB’s QE plan might have already blown a EU92b hole in defined-benefit pension plans by depressing bond yields, S&P said Feb. 26; if the actual start of QE pushes yields further, for longer, companies may have to take drastic measures to make ends meet, and could face a hit to their credit ratings
- Reserve Bank of Australia said further interest-rate cuts could be needed to bolster growth after it unexpectedly left its benchmark unchanged
- PBOC Deputy Governor Yi Gang says he doesn’t see urgent need to change yuan band, current range for yuan trading is “much more flexible than before”
- The Swiss economy grew twice as fast as economists forecast at the end of 2014, indicating resilience before the central bank scrapped a currency cap that was shielding exporters
- Hillary Clinton used personal e-mail account to conduct govt business as secretary of state, State Department officials say, and may have violated federal requirements that official correspondence be retained as part of agency’s record: NYT
- Sovereign 10Y yields higher. Asian stocks mostly lower. European stocks stocks gain; U.S. equity-index futures decline. Crude higher; gold little changed, copper falls
US Economic Data
- 9:45am: ISM New York, Feb. (prior 44.5)
- 10:00am: IBD/TIPP Economic Optimism, March, est. 47.5 (prior 47.5)
- Wards Total Vehicle Sales, Feb., est. 16.7m (prior 16.56m)
- Wards Domestic Vehicle Sales, Feb., est. 13.4m (prior 13.31m)
DB's Jim Reid completes the overnight news roundup
Over the last few weeks it feels like there's been a big story to talk about everyday. We had the build-up and announcement of ECB QE, the SNB shock, the Greece story, negative bond yields and numerous central banks easing across the globe. This morning it feels like we're in a little lull and the story that has caught our eye most over the last 24 hours is purely a sentimental one. Yesterday the NASDAQ closed above 5000 for the first time since March 2000. At the time we have fond memories of showing a graph of the S&P 500 after 1929, pointing out that after that bubble burst, it took until 1954 for the index to scale its former peak. Well on this measure the NASDAQ has done rather well, only taking 15 years to get close to its old peak (of 5049).
The NASDAQ 2000 bubble and the current negative government bond yields are linked in our opinion. Over the last 15-20 years policy makers have tried to limit the fall-out from various major shocks/events by very aggressive stimulus not seen before in history. No bubble has been allowed to fully correct naturally without such intervention. To cut a long story short this has ensured rolling bubbles through the financial system (equities, finance, housing, credit, private debt) and there's little doubt in our mind that there is a now a bubble in parts of the government bond market as a result of this policy super-cycle. It’s very hard to say when this bond bubble will burst as indeed its needed to some degree to smoothly finance the mountain of debt we have. However it will likely burst in some form eventually. The best case scenario for this to unwind and avoid a financial crisis will be for bond holders to take a slow and long haircut via inflation. There is precedent for this as US and UK government bond investors saw their investments half in real-terms in the 35 years that followed WWII after a large debt build up. A stunningly bad period for fixed income returns but one without defaults.
The conclusion from this is that we believe there are long cycles in markets. When equities are chronically overvalued they can easily go nowhere for a couple of decades. However when bonds are chronically over-valued you may either never get your money back or have it eroded aggressively by inflation. Fascinating times. I'm really not sure how central banks get out of this one longer-term without serious damage. However the start of the resolution to this story could still be someway ahead.
While we're on this subject a reminder that yesterday we published a note looking at the record monthly run of positive total returns of the iBoxx Euro indices. In the note we showed that the government benchmark to these indices was now negative for the first time and the credit index now below 1% (also for the first time). We also showed that a 2bps increase in yields in a month was now enough for a negative total return for Euro credit indices. So while we still like spreads, periodic negative total return months are becoming inevitable.
Following on from this yesterday was a day of rising bond yields. 10y Bunds rose 2.7bps to 0.354% which much of the move coming late in the day whilst US Treasuries went back above 2% climbing 8.9bps to 2.082%. It was weaker day across the Treasury curve in fact as 2y yields closed at 0.662% (+4.4bps) and are now just off the 2015 highs in yield we saw back in early January (0.665%). Although yesterday’s macro data was mixed, there was enough in it to disturb bonds a little. Following the weak Chicago PMI on Friday, it was all eyes on the ISM manufacturing yesterday afternoon in the US which, despite falling 0.6pts to 52.9 and the lowest reading since January last year, was more or less in line with expectations (53.0) and helped abate some of the earlier fears from Friday’s shock reading. In conjunction with the better sentiment from the China move over the weekend, the S&P 500 closed +0.61% - offsetting three previous days of decline to record a fresh record high.
Data elsewhere in the US was largely mixed. Both personal income (+0.3% mom vs. +0.4% expected) and personal spending (-0.2% mom vs. -0.1% expected) were a touch below expectations. The PCE deflator was as expected with the energy influenced headline down to +0.2% yoy (from +0.8%) and the core unchanged at +1.3% yoy. Meanwhile, in contrast to the ISM print, the final reading of the Markit manufacturing PMI rose 0.8pts to 55.1 in February. Finally the ISM price paid was unchanged at 35 (although below expectations of 37.5) and construction spending surprised to the downside (-1.1% mom vs. +0.3% expected).
Meanwhile in Europe yesterday, focus was on the inflation print for the Euro-area which helped support a move wider in bond yields across the region. The headline CPI estimate of -0.3% yoy for February was down three-tenths of a percent from January but came in a touch ahead of expectations (-0.4% yoy) whilst the final core reading for the month was unchanged at +0.6% yoy. Elsewhere, it was case of generally mixed prints. Unemployment came in below consensus (11.2% vs. 11.4% expected) whilst the final February manufacturing PMI print for the region was revised down a tenth to 51.0 as Germany was revised up (51.1 vs. 50.9 previously) but offset by a lower revision for France (47.6 vs. 47.7 previously). Meanwhile the preliminary February manufacturing PMI reading for the UK was firmer than expected at 54.1 (vs. 53.3) – and was in fact the highest reading since July last year.
Despite the better than expected inflation print, bourses in Europe were generally subdued with the Stoxx 600 finishing -0.23% and DAX +0.08%. Energy stocks (-1.30%) were a notable drag however after Brent (-4.86%) in particular took a sharp leg lower.
There was further chatter in Greece yesterday after the Spanish economy minister, Luis de Guindos, suggested that the Eurogroup were looking at a third bailout package for Greece worth in the range of €30bn - €50bn. Specifically, Guindos was quoted on the FT as saying that ‘we are negotiating a third rescue for Greece’ which would likely provide for ‘flexibility’ and include new attached conditions. The suggestions of a third package is not a surprise although it’s the first signs from Euro members that talks of such nature have happened beyond just the extension of the current programme. Attention in the near term however continues to be on current financing for Greece with continued worries that the government is due to run out of cash this month. An upcoming T-Bill auction tomorrow will be watched closely given the €1.4bn maturing on Friday for the nation as well as a €300m IMF repayment. With tensions clearly running high on the current liquidity position, according to the UK Telegraph, the Greek economy minister Stathakis was reported as saying that the government could also draw upon various central bank deposits including pension reserves.
Quickly glancing over our screens this morning, focus has been on Australia in large part following the RBA meeting in which the Central Bank has, to some surprise, kept rates on hold – however there was some indication in the statement that further rate cuts could be appropriate over the near term. The AUD has rallied around +0.8% versus the Dollar following the news whilst the ASX has fallen 0.42% as we type.
Elsewhere, bourses are generally mixed. The Shanghai Comp (-1.12%) is weaker whilst the Nikkei (-0.04%) and Hang Seng (-0.05%) are largely unchanged and the Kospi (+0.24%) is higher. In terms of the day ahead, it’s a lighter calendar in Europe today with Euro-area PPI, German retail sales and Spanish employment data all due up. Meanwhile across the Atlantic this afternoon in the US we’ve got the ISM NY, IBD/TIPP economic optimism index and February vehicle sales data all due.