Closing out another whirlwind week, which has seen the biggest S&P 500 intraday plunge and surge in months, futures are taking a breath (if not so much the Nikkei which closed over 19,000 for the first time since 2000 - one wonders how many direct equity interventions it took the BOJ [25]to achieve that artificial "price discovery"). In lieu of any notable macro news, the most significant update hit less than an hour ago when Goldman piled on the EUR pressure, when it released a note in which it further revised down its EURUSD forecast.
Here is the key section from Goldman's Robin Brooks:
In the month following the ECB's QE announcement on January 22, EUR/$ went sideways as markets looked for a new catalyst. At the time, in an FX Views entitled “The End of the Beginning”, we argued that the downward trend in EUR/$ is powerful for several reasons. In particular, we flagged building portfolio outflows by Euro area residents as a driver of EUR/$ lower and since then have written repeatedly (see here, for example) on the normalization in US monetary policy – the fading role of forward guidance – as another catalyst. We see the latest downdraft in EUR/$ as a reflection of both forces and update our forecast to 1.02, 1.00 and 0.95 in 3, 6 and 12 months (from 1.12, 1.10 and 1.08 previously), as well as 0.85 and 0.80 at end-2016 and end-2017 (from 1.00 and 0.90), respectively. We therefore expect more downside in the near term, with the expected removal of “patient” at next week’s FOMC a key catalyst. In the longer term, we continue to believe that EUR/$ will significantly undershoot our GSDEER measure of fair value (around 1.20), reflecting diverging growth and monetary policy outlooks.
[26]
Following the note the EURUSD once again dipped below 1.06 and is once again approaching the overnight lows of 1.0565, however, keep in mind it is the 1.05 level and just below it [27]that is most critical support: its breach and opens a gap down as far as 0.84.
The other key story over the past week has been European bond yields, which have crashed. Today, however, the ECB appears to be late with its bond-buying and as a result there is some redness on the morning update. Considering the ECB still has over $1 trillion in purhcases for the duration of the program (even not assuming an open-end) and a scarcity of sellers, expect this redness to turn quite green soon enough.
European government bond markets on Tradeweb this morning. pic.twitter.com/kdl6Veofj4 [28]
— Tradeweb (@Tradeweb) March 13, 2015 [29]
Looking at equities, Asian stock rose after taking the lead from a positive Wall Street close where the S&P 500 (+1.3%) saw its biggest gain in over a month, as expectations for a Fed rate hike were pushed back following a poor US retail sales report. Consequently, the Nikkei 225 (+1.4%) gained for a 3rd day and is on course to finish above 19,000 for the first time in almost 15yrs. Hang Seng (+0.1%) and Shanghai Comp (+0.7%) are also traded in the black, with the latter heading for its highest close since 2009, led by further outperformance across financial stocks. JGBs tumbled led by the long-end prompting some curve steepening, after the BoJ skipped operations in the over 10yr zone in today’s JPY 1.05trl JGB purchase operation and strong Japanese stocks.
European equities currently trade in positive territory, albeit modestly so with things particularly quiet for the session so far. Bunds trade relatively unchanged with German paper initially subject to a bout of profit-taking from the substantial gains seen earlier in the week, although Bunds have since pulled away from their worst levels in what has been an otherwise directionless session so far for fixed income markets. With things this quiet it is likely that European participants will chose to await the US PPI and Univ. of Michigan releases and see if US participants look to extend the gains seen on Wall Street yesterday.
In FX markets, despite pulling off its best levels the USD-index has once again been the main driving force for currencies with both EUR and GBP weighed on by the greenback. But as has been the case across other asset classes, things remain relatively subdued. One source of focus will be the Russian rate decision with the central bank expected to cut rates by 100bps to 14.0% in an attempt to help reduce the burden of higher rates on its domestic banking sector.
In metals markets, Copper extended on its gains during Asia hours with prices printing fresh month-to-date highs, while Dalian iron ore futures also gained by just under 1%, underpinned by yesterday’s stronger than expected lending data from the world’s largest purchaser China. Elsewhere, both Brent and WTI crude futures have failed to gain any noteworthy direction with prices set for their longest streak of weekly declines for around 2 months amid ongoing supply increases.
In Summary: European shares rise with the retail and autos sectors outperforming and oil & gas, food & beverage underperforming. Euro is weaker against the dollar. Nikkei closes above 19,000 for first time since April 2000. Record U.S. crude inventories may renew price falls, curb output, IEA says. U.K. house data shows price rises slowing. Spanish and Swedish markets are the best-performing larger bourses, U.K. the worst. Japanese 10yr bond yields rise; German yields increase. Commodities decline, with natural gas, soybeans underperforming and nickel outperforming. U.S. Michigan confidence, PPI due later.
Market Wrap
- S&P 500 futures up 0.1% to 2059.1
- Stoxx 600 up 0.1% to 395.9
- US 10Yr yield up 2bps to 2.14%
- German 10Yr yield up 1bps to 0.26%
- MSCI Asia Pacific up 0.1% to 143.9
- Gold spot up 0.2% to $1156.4/oz
- Eurostoxx 50 +0.1%, FTSE 100 +0.1%, CAC 40 +0.1%, DAX +0.2%, IBEX +0.4%, FTSEMIB +0.1%, SMI +0.3%
- MSCI Asia Pacific up 0.1% to 143.9, Nikkei 225 up 1.4%, Hang Seng up 0.1%, Kospi up 0.8%, Shanghai Composite up 0.7%, ASX down 0.6%, Sensex down 1.3%
- Euro down 0.27% to $1.0606
- Dollar Index down 0.01% to 99.42
- Italian 10Yr yield up 2bps to 1.15%
- Spanish 10Yr yield up 2bps to 1.17%
- French 10Yr yield little changed at 0.5%
- S&P GSCI Index down 0.2% to 402.6
- Brent Futures down 0.4% to $56.9/bbl, WTI Futures down 0.3% to $46.9/bbl
- LME 3m Copper up 0.2% to $5853.5/MT
- LME 3m Nickel up 1.1% to $14055/MT
- Wheat futures little changed at 507 USd/bu
Bulletin Headine Summary from Bloomberg and RanSquawk
- Equities trade in minor positive territory with no real pertinent macro newsflow so far
- The USD-index once again trades higher, subsequently placing some modest weight on EUR/USD and GBP/USD
- Looking ahead, today sees the release of US PPI, Univ. of Michigan Confidence and the Canadian jobs report
- Treasuries head for weekly gain after strong demand at 3Y, 10Y auctions and weaker than forecast retail sales undermined case for Fed to begin raising rates in June.
- Over $60b of investment-grade bond have priced this week, second consecutive week to top $50b; $6.5b high-yield priced, with Valeant’s $10b equivalent in four parts (three USD, one EUR tranche) to price today
- Greece’s war of words with Germany deepened as Greece renewed demands for war reparations and formally complained about Finance Minister Wolfgang Schaeuble, who suggested on Tuesday that Greek FinMin Varoufakis needed to look more closely at an agreement Greece signed in February
- Russia’s central bank lowered its key rate in line with most economist forecasts, as stabilizing inflation clears the path to boosting an economy buckling under low oil prices and sanctions over Ukraine
- Governor Lars Rohde says Denmark’s central bank hasn’t had to intervene in currency markets since the end of February as a speculative attack against the krone dies away
- PBOC Governor Zhou Xiaochuan, speaking at a rare press conference, said that credit funds in stocks is good for economy: “There’s a view that credit funds shouldn’t enter the stock market, arguing that funds in stocks won’t support real economic growth -- I personally don’t agree with this view”
- Sovereign 10Y yields higher. Asian, European stocks mostly lower, U.S. equity-index futures gain. Crude lower, gold higher, copper little changed
US Event Calendar
- 8:30am: PPI Final Demand m/m, Feb., est. 0.3% (prior -0.8%)
- PPI Ex Food and Energy m/m, Feb., est. 0.1% (prior -0.1%)
- PPI Ex Food, Energy, Trade m/m, Feb., est. 0.1% (prior -0.3%)
- PPI Final Demand y/y, Feb., est. 0% (prior 0%)
- PPI Ex Food and Energy y/y, Feb., est. 1.6% (prior 1.6%)
- PPI Ex Food, Energy, Trade y/y, Feb., est. 0.8% (prior 0.9%)
- 10:00am: U. of Mich. Sentiment, March preliminary, est. 95.5 (prior 95.4)
- U. of Mich. Current Conditions, March p (prior 106.9)
- U. of Mich. Expectations, March p (prior 88)
- U. of Mich. 1 Yr Inflation, March p (prior 2.8%)
- U. of Mich. 5-10 Yr Inflation, March p (prior 2.7%)
DB's Jim Reid completes the overnight event recap
Welcome to the second successive Friday 13th, I've no idea the last time this happened, but obviously it’s the previous Friday February 13th that wasn't a leap year. Ahead of this the market had a shock yesterday as Bund yields actually went up and scaled the dizzy heights of 0.25% (4bps higher) although as we'll see below the peripheral rally continued at high speed in the morning to fully reverse by cob. I think it says a lot about the emotion quality of my readers that this week I've had well over a thousand congratulatory messages following my announcement on Tuesday but when I asked yesterday as to whether anyone had any strong conviction about the direction of bunds over the next 3-6 months I had 8 replies out of 29,500 official subscribers. The majority of these (ok about 6) felt that bund yields were vulnerable over that period and the market bordering on crazy. A couple felt that while they might be crazy long-term they saw no reason why the rally couldn't continue given the supply demand dynamics. So maybe not the largest sample in the world but the lack of responses probably reflects the difficulty of the question.
If you're looking for some justification for the seeming madness, DB rates strategist Abhishek Singhania highlighted that whilst in recent days Eurozone GDP weighted 10Y real yields have declined sharply to ~ -75bps, this is not out of line with the recent post-crisis experience in the US. Across the Atlantic they went to as low as -115bp and remained in the below -50bps range for a year and a half from 2012 to mid 2013. Also in the aftermath of the global financial crisis until the end of Fed QE (i.e. from 2009 onwards until Oct-14), Eurozone real yields have averaged 100bps over US real yields, well above the pre-crisis average. Given this Abhishek concluded that whilst real yields in the Eurozone are declining rapidly and the spread to US is below the pre-crisis average, if the policy objective is seen to be to undo the potential negative effects of having had very high real yields relative to the US over the past few years it remains hard to call a reversal in aggregate Eurozone yields anytime soon unless there is an increase in inflation expectations in the Eurozone. Whilst you can debate quite how normal US yields and (so comps against them too) have been over the past few years it certainly suggests that perhaps European rates markets at the moment are reflecting the ECB finally joining in the global policy/currency war/financial repression battle that it has been losing for half a decade. Anyway all food for thought and as we said yesterday we'd rather own spread product than Bunds at these levels.
Overall the QE trade took a breather yesterday with the euro strengthening +0.5% vs the dollar, the 10yr bund rising 4bps as already discussed and European equity markets flat-to-down. Spain and Italian 10 year bonds saw a whirlwind day with the former breaking through 1% for the first time in the morning before closing flat for the day at 1.14% and the latter hitting 1.03% before moving back to 1.13%, also flat. The notable outperformers yesterday despite some mixed economic data (more later) were US assets with the S&P500 up 1.3% and back in positive territory for the year with CDX IG and HY tightening 1bps and 6bps respectively.
The disappointing US retail sales number(-0.6% vs +0.3% expected) dictated the day's moves as markets re-evaluated the probabilities of an early Fed hike. Interestingly the Atlanta Fed's GDPNow forecast which we highlighted earlier in the week, ticked down to 0.6% from 1.2% for Q1. It’s a weekly update. Weather is taking much of the blame and continues to make analysis tricky but if it’s tough for the market, it’s also tough for the Fed too. We won't get clean data for a few months. Complicating matters further we also had another outperforming labour market number as the initial jobless claims came in better than expected (289k vs 305k). We also saw the Q4 US household change in net worth which rose by an impressive $1517.4bn.
If all that isn't confusing enough, DB’s Jerome Saragoussi commented yesterday that whilst updating his US CPI forecasts his current estimates now show US headline inflation at -0.43% in June with energy prices and the dollar not helping. On top of this Jerome added that not only will headline look bad in June but the outlook for core CPI remains bleak through 2016 given the strengthening of the dollar and the lagged impact on core goods inflation via the channel of import prices. Rate hikes in a month where we look set to have fairly large negative CPI and possibly a deteriorating outlook for core inflation for at least a year ahead would be, optically at least, an interesting sell. A few months ago it would have been inconceivable to think the Fed would raise rates when inflation was negative.
In terms of data/news flow yesterday, in Europe French February CPI came in slightly above expectation at +0.7% MoM whilst the Spanish read was in-line at +0.1% MoM. We had eurozone January IP which came in notably below expectation at -0.1% MoM. In the UK, Bank of England governor Mark Carney made some dovish comments surrounding the, “risk that the combination of persistently low global inflation and the strength of sterling could weigh on prices here for some time.” On a theme we’ve touched on a lot this week, he made some interesting comments on the risk of possible currency strength in the current global macro environment: “In an environment of low rates everywhere, even a bank rate of half a percent might look high-yielding… and the fear of a bad outcome abroad could trigger safe-haven capital flows into the U.K. that push the value of sterling higher, making exporting more challenging, with knock-on implications for wages and prices here.” (Bloomberg News). The UK 10Y ended the day 8bps lower and EURGBP rose +0.8%. Elsewhere the war of words between Greece and Germany took another turn yesterday with news that earlier in the week the Greek ambassador in Berlin made an official protest apparently over comments made by Finance Minister Wolfgang Schaeuble and his tone (Reuters). In perhaps more meaningful news the ECB increased the maximum ELA available to Greek banks by €600m according to people familiar with the matter (Bloomberg News).
While much of the attention this week has been on eurozone government bond markets, looking at fund flows the demand for HY credit in Europe also remains impressive. The past week has seen a 9th consecutive week of inflows into Western Europe HY funds with the latest number in excess of +$1bn, setting another new record for inflows (in notional terms) and pushing YTD cumulative net flows above +$5bn. The continued inflows in Europe are in contrast to what we have seen in the US over the past week with North American HY funds seeing more than $2bn of outflows, the first week of outflows since mid-January. YTD we have still seen more than $8bn of net inflows.
Overnight we have had the final read of Japanese January IP which came in slightly weaker than previously at +3.7% MoM however the market seems to be looking past this with Asian equities up notable as we type. The Nikkei is up +1.7%, the Shanghai composite is up +0.4% and the MSCI APEX 50 up +0.6%. Credit is also performing with iTraxx Asia IG 1.5bps tighter.
Looking to the day ahead we have a relatively quiet day in Europe whilst over in the US we have February PPI (expected to rise to +0.3% MoM) and UoM sentiment expected in at 95.5.
