After three days of unexpected market weakness without an apparent cause, especially since after 7 years of conditioning, the algos have been habituated to buy on both good and bad news, overnight futures are getting weary, and futures are barely up, at least before this morning's transitory FX-driven stop hunt higher. Whether this is due to the previously noted "blackout period" for stock buybacks [38]which started a few days ago and continues until the first week of May is unclear, but should the recent "dramatic" stock weakness persist, expect Bullard to once again flip flop and suggesting it is clearly time to hike rates, as long as the S&P does not drop more than 5%. In that case, QE4 is clearly warranted.
Asian stocks traded mixed overnight following a negative Wall Street close although newsflow remained light and markets quiet. The Nikkei 225 (+0.2%) overturned its early losses ahead of the close, while the Shanghai Comp (-0.8%) is poised to halt its longest streak of gains in 23yrs, weighed on by poor earnings from several large financial names. Elsewhere, the Hang Seng (+0.5%) was the session’s best performer lifted by China Mobile after the company announced a plan to cut its Capex this year by 6.5%.
Most major currencies steadied overnight against the USD after the index pared back some of yesterday’s post US CPI-inspired gains. NZD was the session’s laggard after NZ February trade balance data showed the widest deficit in more than 5yrs (12-Month YTD -2.18bln vs. Exp. -1.85bln) and weakness was also seen in AUD following the RBA Financial Stability Review which prompted markets to tweak expectations of a rate cut to 61% probability of a rate cut at the Apr. 7th meeting vs. 49% before the release. In other news, Brazil's central bank announced it will not extend its FX intervention program past March 31st.
Newsflow and firm direction has been lacking in this morning’s European trade with equity markets trading mixed although the USD continues its downward trend. In overnight news reports suggested that the ECB are looking to make it illegal for lenders in Greece to add to their government debt pile by loading up on short-term debt, a move which could force the hand of Greece into a compromise with the Eurogroup in order to get continue to raise much needed cash. Headlines on Greece are also expected today as the ECB are believed to be planning a call today to assess emergency funding for Greek banks, however it is worth bearing in mind that Greece markets are closed today for a market holiday. EUR has failed to be negatively dented by overnight developments and the slide in the USD has supported the pair in earlier trade, which has also led to upside in other EUR crosses.
Fixed income markets have been pretty quiet this morning so far although German paper supported by some slight weakness in Equities. Gilts continue to outperform and have shrugged off overnight comments from BoE Deputy Governor Shafik (Soft Dove) who said the next move in rates is likely to be higher, however the BoE are still open to possible cuts in the future. Peripheral spreads are marginally wider this morning however there are no major standouts across the bloc.
Barclays Prelim Pan Euro Agg month-end extensions +0.07yrs (Prev. +0.07yrs, Avg. Of last 12 months +0.08yrs) Barclays Prelim month-end extensions for US Treasury +0.09yrs (Prev. +0.13yrs, Average of last 12 months +0.10yrs)
Crude futures have pared overnight weakness alongside an uptick in gold and silver prices, shrugging off the build shown by the API inventories yesterday which saw a build in oil stockpiles of 4.8mln vs. Prev. 10.5mln and ahead of the DoE inventories which are expected to show a build of 4.75mln for the headline.
In summary: European shares fall with the personal & household and food & beverage sectors underperforming and autos, basic resources outperforming. Euro strengthens as German business confidence rose for 5th month in March. European shares trading off session low. The French and Spanish markets are the worst-performing larger bourses, the Swedish the best. The euro is stronger against the dollar. German 10yr bond yields fall; Japanese yields increase. Commodities little changed, with natural gas, nickel underperforming and Brent crude outperforming. U.S. mortgage applications, durable goods orders, capital goods orders due later.
Market Wrap
- S&P 500 futures up 0.1% to 2087.8
- Stoxx 600 down 0.3% to 401.4
- US 10Yr yield little changed at 1.87%
- German 10Yr yield down 2bps to 0.22%
- MSCI Asia Pacific up 0.2% to 149
- Gold spot down 0.1% to $1192.1/oz
- 45.8% of Stoxx 600 members gain, 50.3% decline
- Eurostoxx 50 -0.4%, FTSE 100 +0.1%, CAC 40 -0.5%, DAX -0.2%, IBEX -0.3%, FTSEMIB -0.2%, SMI -0.2%
- MSCI Asia Pacific up 0.2% to 149; Nikkei 225 up 0.2%, Hang Seng up 0.5%, Kospi up 0.1%, Shanghai Composite down 0.8%, ASX up 0.1%, Sensex down 0.2%
- Heinz to Merge W/Kraft as Berkshire, 3G Invest $10 Billion
- Hutchison to Buy U.K. Mobile Network O2 for $15.3 Billion
- Airbus to Sell Additional Stake in Dassault Aviation
- Euro up 0.27% to $1.0953
- Dollar Index down 0.23% to 96.97
- Italian 10Yr yield up 2bps to 1.34%
- Spanish 10Yr yield up 2bps to 1.31%
- French 10Yr yield down 1bps to 0.5%
- S&P GSCI Index up 0.1% to 400.5
- Brent Futures up 0.8% to $55.5/bbl, WTI Futures up 0.1% to $47.6/bbl
- LME 3m Copper down 0.6% to $6109.5/MT
- LME 3m Nickel down 1.1% to $13790/MT
- Wheat futures little changed at 523.8 USd/bu
Bulletin Headline Summary From RanSquawk and Bloomberg
- Reports suggest that the ECB are looking to make it illegal for lenders in Greece to add to their government debt pile by loading up on short-term debt, a move which could force the hand of Greece into a compromise with the Eurogroup in order to raise much needed cash
- Otherwise markets have been quiet in early European trade although central bank speakers are due on the docket including Fed’s Evans and ECB’s Weidmann
- Treasuries steady as week’s auctions continue with 2Y floaters and 5Y notes; latter yield 1.375% in WI trading vs. 1.48% award in February.
- Yesterday’s$26b 2Y auction was awarded at 0.598% vs 0.602% WI bid at 1pm, according to Stone & McCarthy, with biggest direct award since June 2014 (18.3%)
- The international economic architecture crafted by the U.S. after WWII faces its biggest shakeup yet as U.S. allies defy America to back China’s initiative to establish the Asian Infrastructure Development Bank
- Germany’s Ifo institute business climate index advanced to 107.9, more than expected, from 106.8 in March
- Brazil’s central bank scaled back its support for the real, ending sales of new foreign-exchange swaps that had swelled the government’s dollar liabilities
- Lifting oil sanctions on Iran could hit global markets long before the nation starts pumping more crude as the OPEC member has been stockpiling oil onshore and in supertankers in the Persian Gulf, according to data compiled by Bloomberg
- Forces loyal to Yemeni President Abdurabuh Mansur Hadi collapsed in the face of rebels, who advanced deeper in the south toward his stronghold in the port city of Aden
- French helicopters searched for bodies and wreckage of the Airbus A320 that crashed in rugged terrain in the French Alps while en route to Germany from Spain.
- Sovereign 10Y yields mixed. Asian stocks mixed, European stocks decline, U.S. equity-index futures rise. Crude, gold and copper lower
US Event Calendar
- 7:00am: MBA Mortgage Applications, March (prior -3.9%)
- 8:30am: Durable Goods Orders, Feb., est. 0.2% (prior 2.8%)
- Durables Ex-Transportation, Feb., est. 0.2% (prior 0.3%, revised 0%)
- Capital Goods Orders Non-Defense, Ex-Aircraft, Feb., est. 0.3% (prior 0.6%, revised 0.5%)
- Capital Goods Ship Nondef Ex Air, Feb., est. 0.3% (prior -0.3%, revised 0.1%)
DB's Jim Reid completes the overnight event summary
I noticed yesterday that a new series of cult 1990s TV program the "X-Files" is coming back to our screens. FBI agents Mulder and Scully used to investigate unexplained paranormal phenomena in a covert wing of the organization. Apparently their first case in the new series is on negative bond yields as in the original series back in the 1990s this was seen as too far fetched to use as a plot line!! On a serious note this was one of my favorite programs back in the day so I'm looking forward to a return of UFOs and Aliens.
Talking of spooky occurrences, yesterday saw the 25th day without the S&P 500 (-0.61%) experiencing consecutive gains. This is the longest such stretch since 2001. US equities are struggling for momentum in a post Fed QE, uncertain Fed rate outlook, strong dollar world. Having said that the dollar continues to be relatively weak post FOMC last week. Indeed, despite a +0.16% gain for the broader DXY yesterday, the index is down around 2.3% from the levels just prior to the FOMC statement release. Price action in the US yesterday was largely driven by the CPI numbers – which we’ll touch on shortly. Equity markets closed at their lows for the day while US Treasuries bounced as the curve flattened. 10y (-3.8bps) and 30y (-5.0bps) yields were lower at 1.873% and 2.464% respectively. The former is in fact now 37bps off the highs in yield of earlier this month. In the commodity complex, Gold (+0.31%) was higher for the fifth consecutive day, however oil markets were somewhat mixed with WTI (+0.13%) higher but Brent (-1.45%) declining.
With much of the global focus on the data yesterday and with UK YoY% headline inflation hitting zero for the first time since 1960, and likely to enter deflation soon for the first time in 55 years, we thought we'd show one of our favorite graphs that we often use in our long-term studies. This is UK inflation back 800 years. To make it easier to read (and more relevant) we've also repeated it from 1900. Indeed prior to 1900 deflation and inflation were broadly equal partners. In an era where money was linked to precious metals deflation was arguably the natural state as human ingenuity and productivity growth and a fixed supply of money encouraged prices to fall over time. The periods where overall prices picked up likely reflected discovery/introduction of new precious metals in circulation or a debasement (punching holes in coins was a tactic used by some governments). However post the twentieth century ties to precious metals periodically weakened and eventually broke completely in 1971 with the Bretton Woods system imploding. So the last century has been the century of inflation and fiat currencies. As we're still in a world of fiat currencies it’s fairly remarkable that we're still flirting with deflation in many countries and returning to levels more consistent with a fixed supply of money. On the contrary we have seen a huge amount of money printed in the last 6-7 years across the globe but not much inflation to show for it. Most of the QE has ended up pushing asset prices higher and has not really made it into the real economy. The transmission mechanism continues to be broken and for as long as it is then inflation will respond with a very low multiplier to QE. If the money printing seen so far had been used by Governments to directly finance real economy projects (e.g. infrastructure/ tax cuts) then we likely would have seen much higher inflation.
Staying with inflation, across the Atlantic yesterday, the modest beat in US CPI attracted most of the attention. The headline +0.2% mom print was enough to nudge the annual rate up to 0.0% yoy, which was ahead of both expectations (-0.1%) and up from the -0.1% yoy we saw in January. The core also saw a modest beat, with the +0.2% mom reading for February (+0.157% to be exact), a touch above expectations (+0.1%). It was enough to push the annualized reading up one-tenth to 1.7% yoy and in line with consensus.
Data elsewhere in the US was a mixed bag. New home sales (+7.8% mom vs. - 3.5% mom expected) were a considerable beat for February although the FHFA house price index showed a 0.4% drop to +0.3% mom, and below expectations of +0.5%. Manufacturing indicators were somewhat contrasting yesterday. The preliminary March manufacturing PMI (55.3 vs. 54.6 expected) came in ahead of market, however the Richmond Fed manufacturing index for March wasn’t quite so positive, with the -8 reading 8pts down from the February reading and well below expectations of a reading of 3. The print was in fact the lowest since January 2013. The St Louis Fed President, Bullard (a non-voter) meanwhile noted that unless market expectations for interest rates line up with the outlook of policy makers, then the market reaction could be ‘violent’ in the event of a surprise move by the Fed. Bullard did however say that, ‘given the extent of discussion about it, I’d be surprised if we get all the way to that juncture’ (Bloomberg).
Moving on, this morning we've published a note entitled "Credit left behind post-QE. Lessons from 2000?" where we look at how credit performance has been impacted by a 'buy the rumour - sell the fact' theme post QE starting. While the announcement (and the lead up) of government bond purchases by the ECB in January was generally greeted with strength in EUR credit, the start of the purchases on the 9th March has seen a more sober environment for the asset class. While Germany and French yields are around 12bps lower since QE started, the Peripherals are broadly flat, Euro IG credit yields are generally a handful of bps higher with HY up to 30bps weaker. So credit spreads have moved meaningfully.
Although we continue to think credit spreads will tighten this year given the need for yield and decent fundamentals we make comparisons in the note to the build up to the year 2000 where credit got hit by the all-time wides for swap spreads. This occurred when the market was pricing in a long period ahead of Government buy backs of debt. Indeed the US CBO was predicting that the entire US debt could be eliminated by 2013!! It’s amusing to think back to this prediction. The experience is a reminder that credit spreads are simply the relative supply/demand balance between the benchmark (say bunds) and credit. At the moment the former is seeing extreme demand relative to supply (like in 2000) and the later has seen high demand but is perhaps currently digesting record corporate supply.
While we think the extra yield story and decent fundamentals will be too compelling for investors to ignore given where Government bonds trade, it is a reminder of what spreads actually are. They are a relative not absolute measure. It’s not impossible to consider a scenario where credit remains well bid but that bunds see an even greater bid. If this is the case spreads will widen. Food for thought to test our positive spread view. See the full note in your inboxes within the last hour.
Wrapping up events from yesterday, better than expected PMI readings in Europe helped support a better day for risk assets in the region. The Stoxx 600 closed +0.31%, the DAX +0.92% and the CAC +0.67% while credit markets also firmed with Crossover 8bps tighter at the close. The better tone generally saw sovereign yields widen with 10y Bunds 1.2bps wider at 0.234% and yields in the periphery 3-5bps wider. In the UK, the FTSE 100 (-0.26%) was lower on the back of the inflation numbers, while the Pound fell 0.68% versus the Dollar to $1.485. Back to the data, preliminary March Euro-area PMI’s beat consensus with the manufacturing (51.9 vs. 51.5 expected), services (54.3 vs. 53.9 expected) and composite (54.1 vs. 53.6 expected) all supportive. The services and composite prints in particular were at the highest level since May 2011. On a regional basis, a 0.5pt fall in the composite reading for France to 51.7 (vs. 51.9 expected) was somewhat offset by a 1.5pt rise for Germany’s composite reading to 55.3 (vs. 55.0 expected).
Elsewhere, Greece was once again the subject of various headlines yesterday. Some of the attention appeared to come from a story on Reuters reporting that Greece is set to submit its list of reforms by next Monday at the latest. The same article suggests that the Greek government is set to run out of cash by April 20th, while the Eurogroup Chairman Dijsselbloem has asked the EFSF to review the Greek government’s case for the €1.2bn in funds left in the Greek bailout fund that was held back by the Eurozone last month. The release of these would clearly be a near term liquidity boost for the nation. Another report suggests that the ECB’s governing council has approved a decision to stop Greek banks increasing holdings of T-Bills. Greek equities (+3.66%) rallied yesterday for their third consecutive day of gains. The pressure has clearly been applied from the European side to force the Greek government to speed up its reform proposals, and with a Monday deadline potentially in the works, we could have greater clarity around where Greece goes from here over the coming week ahead.
Finally in Europe, Ukraine was yesterday downgraded by Moodys to Ca (from Caa3) and kept on negative outlook. The move comes following the Finance Minister Natalie Jaresko’s plea to restructure the country’s debt. Jaresko has urged for more financial aid for the economy, on top of the IMF aid already received earlier this month and with a potential default now looming large.
In terms of the early trading in Asia this morning, bourses are largely mixed with the Nikkei (-0.07%) and Shanghai Comp (-0.91%) lower, but the Hang Seng (+0.46%) and ASX (+0.07%) both trading firmer. The Dollar is softer with the DXY -0.12% as we type. Meanwhile, headlines that private equity firm 3G Capital are in advanced talks to buy Kraft Foods through its Heinz unit have caught our eye. The WSJ is reporting that a deal could be announced as soon as this week.
Moving onto today’s calendar, the March IFO survey for Germany will likely be the highlight this morning, while business and manufacturing confidence readings are also due for France. It’s a quieter calendar in the US meanwhile, with just durable and capital goods orders for February due. The Fed’s Evans is also due to speak today, specifically on economic and monetary policy so will be well worth keeping an eye on.