Did stocks window dressing come one day early in this volatile, bipolar, stop-hunting, HFT-infested market? Looking at futures this morning, which are down about 12 points already on yet another surge in the USD which has sent the EURUSD just above 1.07, the lowest since March 20 , and the USDJPY back under 120 now that the "strong dollar is bad for stocks after all" algo seems to be back from vacation, all those hedge funds who chased risk higher yesterday because their peers did the same, may find they are all selling on the way down. It will be oddly ironic if all of yesterday's widely touted gains evaporate comparably in the first 10 minutes of trading today, and lead to an end in the longest streak of quarterly increases in two decades.
To be sure, China already did, with another early surge in the SHCOMP seeing a 1% pull back in late trading, driven by reports of foreigners getting out ahead of the inevitable tsunami of local high schoolers selling [36]. Japan did not fare much better and the Nikkei also dropped 1% as the last day of the month across Asia has seen broad based selling. For now Europe is buckling the trend with Eurostoxx up modestly, however with newsflow out of Greek negotiations hardly favorable, the question is will the weakness in the EUR be enough to offset yet another day of fundamental insecurity about the future of the Eurozone. As a reminder, every day that Greece remains without a deal is one day closer to a bankruptcy and/or bank run that tips its banks over the edge leading tot he same outcome.
Crude likewise has seen a bout of weakness driven by the drop in the EURUSD, as well as reports from ISNA that a draft agreement was being written up between western powers and Iran over the country’s nuclear enrichment program. As a result Brent extends its drop into the 3rd day, falls below $56 with WTI under $48 as Iran nuclear talks move into final day of high-level diplomacy. Events in Yemen, outcome of Nigeria elections also watched. "The main thing the mkt is looking at is the headlines out of Lausanne, where it looks like at least they will reach a political agreement ahead of today’s deadline," Petromatrix oil analyst Olivier Jakob told Bloomberg. "There is still a bit of a question mark on sanctions and the pace of returning oil, but it is heading too that and more supply on the mkt and that is not good in terms of price." Keep an eye on flashing red Iran headlines which will likely led to even more jagged and stop-hunting WTI trading this morning.
Crude futures and metal prices trade lower this morning alongside another climb higher in the USD which has caused WTI and Brent to fall over USD 1 and Brent edging back towards USD 55 amid a de-escalation of concerns over Yemen.
On the macro front there has been little news this morning or overnight, which means equity indices in Europe trade only marginally higher although the FTSE 100 is underperforming alongside lower crude and metals prices. On the subject of UK asset classes, GBP saw a small lift following a slightly higher than expected revision for Q4 GDP at 0.6% vs. Exp. 0.5% Q/Q, however this failed to dictate medium-term price action. Tobacco names in the UK are underperforming in early trade after early reports from the NY Post that FTC staff are recommending a suit to block the USD 27bln merger of Reynolds American (RAI) and Lorillard (LO). Although today sees the final trading day this month and quarter, markets are relatively quiet heading into the Easter weekend and market closes on Friday. This means fixed income markets have seen little price action this morning and trade largely range-bound. European equities then trimmed their gains following disappointing Eurozone CPI and unemployment figures, the unemployment rate coming in higher-than-expected and January’s reading also revised higher.
Regarding Greece, EU's Tusk said that a deal for Greece could still get completed by end of April but does not expect anything before Easter. Greek press TVXS then reported that officials have said an agreement is very close for Greece and could come within the next 1 or 2 days, however, officials from Greece said a deal had not been agreed with the Troika and talks could continue into next week.
- Eurozone CPI Estimate (Mar) Y/Y -0.1% vs. Exp. -0.1% (Prev. -0.3%)
- Eurozone CPI Core (Mar A) Y/Y 0.6% vs. Exp. 0.7% (Prev. 0.7%)
- Eurozone Unemployment Rate (Feb) M/M 11.3% vs. Exp. 11.2% (Prev. 11.2%, Rev. 11.4%)
The USD index has extended on gains this morning and trades higher by 0.6% after an earlier break above the 50% Fib retracement of the pre-FOMC high to recent low, and a further slide in EUR evident after a break below Friday’s low. Commodity-linked currencies have also seen selling pressure, most notably in AUD & NZD as commodities trade lower across the board in reaction to a stronger USD and traders also noting quarter-end rebalancing is driving sales in AUD/USD & NZD/USD into the London fix. Analysts also note that moves in equities today could lead to selling pressure in CAD, EUR and GBP in Q-end, whereas USD/JPY could see a small bid as >USD 500mln is expected to be bought in the pair.
Bulletin headline summary from Bloomberg and RanSquawk
- Month and quarter-end demand for USD sees the index extend on gains although equity markets drift with little macro news to drive prices
- FTSE 100 underperforms peers as commodities slide alongside a stronger USD and tobacco names weigh on the index
- Looking ahead focus will turn to data from the US with the latest Chicago PMI due for release, API inventories after-market, and GDP from Canada
- Treasuries steady, headed for fifth consecutive quarterly gain amid weak eco data. dovish Fed, USD strength, lower energy prices; volumes expected to be light before payrolls report on Good Friday.
- Greek PM Tsipras sought to rally a consensus in parliament for his effort to secure bailout funds after his proposals to bolster the nation’s finances failed to satisfy his European creditors
- Germany’s jobless rate fell to 6.4% in March, lowest on record, as number of people out of work declined 15k to 2.8m
- Euro-area’s inflation rate rose to minus 0.1% in March from -0.3% the previous month, the fourth consecutive reading below zero and in line with median estimate in a Bloomberg survey
- China said an insurance system for bank deposits will start on May 1, a step toward scrapping remaining controls on interest rates and allowing lenders to fail in a more market-driven economy
- Iron ore is headed for the biggest quarterly loss since at least 2009 as surging low-cost supplies from Australia and Brazil swamp the global market, spurring a glut as demand from China slows
- The near-collapse of Duesseldorfer Hypothekenbank AG, the German lender hit by Heta Asset Resolution AG’s debt moratorium, was prompted in part by a margin call from Eurex, people familiar with the matter said
- Iran and world powers are weighing compromises in order to overcome a deadlock in nuclear talks with little more than 12 hours to reach an agreement
- Obama will face a leviathan task selling any deal to a skeptical Congress; if no deal is reached, he will face an equally daunting challenge of holding off congressional moves to impose new sanctions on Iran
- Sovereign 10Y yields mixed, Greece 10Y +22bps to 11.36%. Asian stocks mixed, with Nikkei lower, Shanghai higher. European stocks, U.S. equity-index futures decline. Crude, gold and copper fall
European Market Wrap
- 9:00am: ISM Milwaukee, March, est. 51.5 (prior 50.32)
- 9:00am: S&P/Case-Shiller 20 City m/m SA, Jan., est. 0.6% (prior 0.87%)
- S&P/CS 20 City y/y, Jan., est. 4.6% (prior 4.46%)
- S&P/CS 20 City NSA, Jan., est. 172.90 (prior 173.02)
- S&P/CS U.S. HPI m/m, Jan., est. 0.80%, (prior 0.73%)
- S&P/CS U.S. HPI y/y, Jan. (prior 4.62%)
- 9:45am: Chicago Purchasing Manager, March., est. 51.7 (prior 45.8)
- 10:00am: Consumer Confidence Index, March, est. 96.4 (prior 96.4)
- TBA: Benchmark Revisions Wholesale Inventory and Sales
Central Banks
- 8:00am: Fed’s Lacker speaks in Richmond, Va.
- 8:50am: Fed’s Lockhart speaks in Stone Mountain, Ga.
- 9:00am: Fed’s Mester speaks in Stone Mountain, Ga.
- 3:00pm: Fed’s George speaks in New York
DB's Jim Reid summarizes the main overnight events
Back to markets yesterday, US equities kicked off the week on a firmer footing as the S&P 500 (+1.22%) recorded its first back-to-back gains in 28 trading days, remarkably the longest such stretch in 21 years. Treasuries were a touch tighter across the curve yesterday, with the 10y benchmark in particular closing 1.4bps tighter at 1.948%. The Dollar had a better day also as the broader DXY closed +0.67%, bucking a recent trend of the Dollar and equity markets moving inversely. In fact, looking closer at the relationship between the two, the 90-day correlation coefficient between the DXY and S&P 500 recently dipped into negative territory earlier this month having traded positive for most of 2014 and YTD so far. Looking further back, the last significant period of positive correlation between the two asset classes was in the early 2000s while the correlation completely reversed post the financial crisis from end-2008 to end-2013. Q1 earnings season, which is due to kick off next week, will likely give an indication into the impact at the micro level from a stronger Dollar. Interestingly, data on Bloomberg shows that profits for S&P 500 companies are expected to decline for the next 3 quarters, with history telling us that for periods of nine months or more a bear market was the end result in 82% of cases over the past eight decades.
While China - which we’ll touch upon shortly - supported the better sentiment yesterday, M&A was also a theme, as deals in the pharma sector in particular helped the risk-on tone. In fact, gains were broad based generally across equity markets and led by energy stocks (+2.10%) despite a relatively subdued day in oil markets as WTI (-0.39%) and Brent (-0.21%) closed modestly weaker. Data on the other hand was somewhat mixed. A better than expected personal income reading (+0.4% mom vs. +0.3% expected) was some offset by a softer personal spending print (+0.1% mom vs. +0.2% expected). The PCE deflator was as expected for February at +0.3% yoy while the core rose one-tenth of a percent to +1.4% yoy (and ahead of expectations of +1.3%). Pending home sales rose significantly however. The February +12.0% yoy reading was up nearly 6% from the previous reading and also well ahead of market expectations of +8.7%. The reading was in fact the highest since April 2013. Finally the Dallas Fed manufacturing index was weak at -17.4 (vs. -8.8 expected), with depressed oil prices clearly having an effect.
Moving onto China, after markets were initially encouraged by the comments from the PBOC’s Zhou over the weekend that growth had slowed more than desired and that the economy has more room to move if needs be, the PBOC acted almost immediately with a loosening of measures in the housing market. Specifically, the government cut the downpayment ratio for second homes from 60% to 40% and the minimum downpayment ratio for first home buyers (who utilize their ‘housing funds’) to 20% from 30%. Our China Chief Economist Zhiwei Zhang believes that these measures may help to mitigate the downturn in the property sector in the next few months but does not believe that such an easing will lead to a sustained recovery, as the structural oversupply in tier 3 and tier 4 cities take time to be absorbed. Zhiwei continues to expect more measures in Q2, including an RRR cut in early April and an interest rate cut in May. Zhiwei also continues to reiterate his forecast of GDP growth of 6.8% in Q1. Having opened strongly, markets in Asia have given up some early gains although are still in positive territory. In China the Shanghai Comp (+0.11%) and CSI 300 (+0.50%) are firmer while the Nikkei (+0.10%) and Hang Seng (+0.47%) are also a touch higher.
Staying on the topic of central banks, and monetary policy implementation in particular, a couple of stories on the ECB and BoJ caught our eye yesterday. Starting with the former, the WSJ yesterday reported that the ECB may have to adapt the rules around its current bond-buying program given the short supply of German bonds available. The article notes that, given the restrictions on purchases below -0.2% in yield, the ECB’s rules prevent it from purchasing around 42% of already issued German bonds, compared to 28% when the program started. Despite Draghi previously downplaying such an issue, further downward pressure on German yields could potentially limit the ECB’s available pool.
Meanwhile, the Nikkei Asian Review yesterday reported on a BoJ working paper released earlier this month that suggested that bond-market liquidity is declining and that the BoJ’s government bond purchases are tightening the demand balance. The results of the paper said multiple indicators suggested bond market liquidity is declining and that while not officially being the view of the BoJ, commented that the view could soon represent the official BoJ stance given that the authors are also responsible for analyzing the JGB market in the banks official Financial System Report, released in April. Interestingly BoJ policymakers have already somewhat acknowledged the issue, with the minutes from the February board meeting saying that ‘a few members pointed to the possibility that the recent rise in rates reflected a decline in market participants risk tolerance and deterioration in market functioning’. Food for thought if anything.
Turning to markets in Europe yesterday quickly, it was a similar story for equities as the Stoxx 600 (+1.09%), DAX (+1.83%) and CAC (+0.98%) all closed higher. Core government bond yields were little changed although 10y yields in Italy (-4.3bps) and Spain (-5.1bps) both tightened. Data was generally supportive on the whole. The preliminary March CPI print for Germany was as expected at +0.3% yoy (+0.1% yoy harmonized) while the Euro-area economic confidence indicator rose 1.6pts to a better than expected 103.9 (vs. 103 expected) – the highest since July 2011. In the UK mortgage approvals in February rose to 61.8k and a touch above consensus of 61.5k. Net consumer credit (£0.7bn vs. £0.9bn expected) was slightly below market while net lending (£1.7bn vs. £1.6bn expected) was above.
Greece continues to be front and centre in Europe and yesterday we heard Euro-area officials push back on the governments ‘list’ submitted on Friday. Despite various positive headlines coming out of the Greece side of talks progressing constructively, it appears that more detail and substance is needed from the Greek side with an EC spokesman saying that the institutions’ technical teams would need to conduct further fact finding in Athens. Following the news, PM Tsipras last night addressed parliament in Athens in a bid to help draw support behind the current government’s strategy. Tensions within the parliament continue to run high however highlighting the current fragile state politically. New Democracy leader Samaras was quoted in Greek press (Ekathimerini) as saying that ‘you took over a country and are preparing to throw it into chaos’, while also warning on a potential ‘credit event’ should the government fail to meet the upcoming IMF payment.
Turning to today’s calendar, we kick off this morning in Europe with German retail sales and unemployment as well as French consumer spending data. The first March estimate for Euro-area CPI will likely attract most of the attention this morning however while unemployment data is also due for the region. Q4 GDP in the UK is also due up. Across the pond this afternoon, we kick off data releases in the US with the ISM Milwaukee shortly followed by the S&P/Case Shiller house price index. The Chicago PMI and March consumer confidence index print round off the releases. There’s also plenty of Fedspeak for us to keep an eye on with Fischer, Lacker, Lockhart, Mester and George all due to speak today.
