Futures Jump Following Worst Chinese Eco Data In 6 Years

Today's even highlight is the monthly ECB meeting day. Given we're only a few weeks into a new policy that's scheduled to last 18 months, expect a lot of questions on whether they can see out the term given the distortions its creating in European bond markets. Greece will also be a focus.

If yesterday stocks surged on the worst 4-month stretch of missing retail sales since Lehman, one which BofA with all seriousness spun by saying "it seems not unreasonable to suspect that the March 2015 reading on retail sales gets revised up next month", then the reason why futures are now solidly in the green across the board even as German Bunds have just 14 bps to go until they hit negative yields and before the ECB is fresh out of luck on future debt monetization, is that overnight China reported its worst GDP since 2009 together with economic data misses across the board confirming China's economy continues its hard landing approach despite a stock market that has doubled in the past year.

Unexpectedly the Shanghai Composite was down overnight despite what is "clearly" evidence of more PBOC easing, and even the bubbly Hang Seng could barely eek out a 0.2% increase. Elsewhere in Asia, stocks trade mostly lower led by Chinese bourses amid poor data, with the Shanghai Comp (-1.2%) on course to for its biggest drop in 6-weeks. Q1 GDP (7.0% vs. Exp. 7.0% (Prev. 7.3%) and March industrial production (Y/Y 5.6% vs. Exp. 7.0%) came in at their 6yr lows, while retail sales (Y/Y 10.2% vs. Exp. 10.9%) also tumbled to multi-year lows. ASX 200 (-0.6%) was weighed on by the Chinese data while the Nikkei 225 (-0.2%) was weighed on by a strong JPY.

European equities bounce back from yesterday’s negative close with the energy sector leading gains after API crude inventories printed a much smaller build than its previous reading, which had reported its largest build since February 18th. In stock specific news, the latest merger deal including Nokia and Alcatel Lucent was confirmed premarket, with the deal valued at EUR 15.6bln. However, Alcatel Lucent (-12.3%) underperform in Europe as the French telecommunications company are to receive 0.55 Nokia shares for one Alcatel Lucent share, which equates to 8% less than Alcatel's closing price yesterday.

Fixed income markets have been relatively tentative ahead of todays’ ECB rate decision with Bunds ebbing higher and consequently printed fresh contract highs as the market seeks further clues on whether the central bank could alter the purchase programme in the future, while UST’s have tracked German paper amid little fundamental news in the session.

The USD-index has partially recovered some of yesterdays’ US retail sales inspired losses causing broad based EUR weakness which saw EUR/GBP make a technical break below 0.7200. Elsewhere, GBP/USD has also been subject to selling pressure with political uncertainty still lingering as the latest YouGov and Sun poll showed; Lab 35% vs. Con 33% compared to yesterdays’ poll which indicated Lab 34% vs. Con 33%. Separately, lacklustre data releases from China, in the form of Q1 GDP (7.0% vs. Exp. 7.0% (Prev. 7.3%) and March industrial production (Y/Y 5.6% vs. Exp. 7.0%) came in at 6yr lows, while retail sales (Y/Y 10.2% vs. Exp. 10.9%) also tumbled to multi-year lows which weighed on AUD/USD as the pair subsequently broke 0.7600 handle to the downside.

In terms of commodities, WTI and Brent crude futures have held onto yesterday’s gains following the release of the API crude inventories data, however upside was capped on the release of the IEA monthly oil report as it forecasted that Saudi Arabia are to increase oil production which would lead to OPEC supply rising to its highest level since 2011. Additionally, today's DoE crude inventories data is expected to show a build of 3.6mln bbl compared to last weeks’ mammoth build of 10.949mln bbl. In precious metal markets, spot gold has traded in a tight range, albeit in minor negative territory alongside modest strength observed in the USD.

In summary: European shares rise ahead of ECB rate decsion with the basic resources and energy sectors outperforming and media, tech underperforming. The Italian and Dutch markets are the best-performing larger bourses, U.K. the worst. The euro is weaker against the dollar. German 10yr bond yields fall; French yields decline. Shares in Shanghai declined for the first time in four days after China GDP; Aussie drops. Commodities gain, with corn, silver underperforming and Brent crude outperforming. ECB to probably leave benchmark rate unchanged at today’s meeting, according to economists. U.S. mortgage applications, Empire manufacturing, net TIC flows, NAHB housing market index, industrial  production, capacity utilization due later.

Market Wrap

• S&P 500 futures up 0.1% to 2093
• Stoxx 600 up 0.7% to 414.4
• Euro down 0.59% to $1.0592
• Dollar Index up 0.49% to 99.21
• US 10Yr yield little changed at 1.9%
• German 10Yr yield down 1bps to 0.13%
• MSCI Asia Pacific down 0.4% to 152.6
• Gold spot down 0.2% to $1190.5/oz
• Eurostoxx 50 +0.6%, FTSE 100 +0.3%, CAC 40 +0.6%, DAX +0.4%, IBEX +0.6%, FTSEMIB +0.8%, SMI +0.4%
• Asian stocks fall with the Kospi outperforming and the Shanghai Composite underperforming.
• MSCI Asia Pacific down 0.4% to 152.6; Nikkei 225 down 0.2%, Hang Seng up 0.2%, Kospi up 0.4%, Shanghai Composite down 1.2%, ASX down 0.6%, Sensex down 0.2%
• Italian 10Yr yield down 1bps to 1.3%
• Spanish 10Yr yield up 1bps to 1.3%
• French 10Yr yield down 1bps to 0.4%
• S&P GSCI Index up 0.9% to 421.6
• Brent Futures up 1.6% to $59.4/bbl, WTI Futures up 1.6% to $54.1/bbl
• LME 3m Copper down 0.2% to $5935/MT
• LME 3m Nickel up 0.7% to $12680/MT
• Wheat futures up 0.2% to 497.3 USd/bu

Bulletin Headline Summary from Bloomberg and RanSquawk

• European equities bounce back from yesterday’s negative close with the energy sector leading gains after API crude inventories printed a much smaller build than its previous reading
• The USD-index has partially recovered some of yesterdays’ US retail sales inspired losses causing broad based EUR weakness which saw EUR/GBP make a technical break below 0.7200
• Looking ahead, sees the release of the ECB rate decision, US Empire Manufacturing, Industrial Production, Bank of Canada rate decision and the NZ Dairy Milk Trade Auction
• Treasuries steady after yesterday’s rally on weaker than expected U.S. retail sales, trailing bigger gains in bunds before ECB rate decision, Draghi press conference.
• Six weeks into the EU1.1t QE program, Draghi is set to be asked at his regular press conference what happens if he succeeds before the provisional end-date of September 2016
• China’s economy expanded 7% in 1Q, weakest pace since 2009, with output, investment and retail data pointing to a deepening slowdown
• Greek government officials and the nation’s creditors resume talks in Athens about the stalled review of the cash-strapped country’s bailout on Wednesday, a day after ECB extended the lifeline to keep the nation’s lenders afloat
• A Labour-led government could put pressure on Bank of England officials to increase interest rates earlier than markets expect as it eases fiscal austerity, according to firms from AXA Investment Managers to Blackrock
• The EU escalated its four-year-old probe into Google Inc., accusing the Internet giant of abusing its dominance of the search-engine market and starting a new investigation into its Android mobile-phone software
• Obama agreed to accept compromise Iran legislation that he didn’t want after it became clear that Democratic lawmakers would join with Republicans in demanding a say on the nuclear deal with the Islamic Republic
• Sovereign bond yields lower. Asian stocks mostly lower. European equities, U.S. equity-index futures gain. Crude oil higher, copper and gold decline

US Event Calendar

• 7:00am: MBA Mortgage Applications, April 10 (prior 0.4%)
• 8:30am: Empire Manufacturing, April, est. 7.17  (prior 6.9)
• 9:15am: Industrial Production, March, est. -0.3% (prior 0.1%)
  • Capacity Utilization, March., est. 78.6% (prior 78.9%)
  • Manufacturing (SIC) Production, March, est. 0.1% (prior -0.2%)
• 10:00am: NAHB Housing Market Index, April, est. 55 (prior 53)
• 4:00pm: Net Long-term TIC Flows, Feb. (prior -$27.2b); Total Net TIC Flows, Feb. (prior $88.3b)

Central Banks

• 7:45am: ECB sets Refinancing Rate, est. 0.05% (prior 0.05%)
• 8:30am: Draghi holds press conference
• 9:00am: Fed’s Bullard speaks in Washington
• 10:00am: Bank of Canada sets benchmark interest rate, est. 0.75% (prior 0.75%)
• 2:00pm: Fed Beige book
• 7:30pm: Fed’s Lacker speaks in Charleston, S.C.

DB's Jim Reid completes the overnight event recap

Today will likely throw you out of sync a bit given it’s an ECB meeting day, mid-month on a Wednesday. Given we're only a few weeks into a new policy that's scheduled to last 18 months, expect a lot of questions on whether they can see out the term given the distortions its creating in European bond markets. Greece will also be a focus. It’s a busy day elsewhere but before we review China's latest GDP (in-line) and the key monthly economic releases (weaker), this morning we've just published our 17th annual default study entitled "2017-2018 - The Next Default Cycle??. The report confirms the recent trend of ultra low defaults seen since 2003 (with 2009 a relatively mild blip). More recently the 2010-2014 cohort just completed is the lowest 5-year period for HY defaults in modern history. We continue to stress that this is due to the (decade plus long) artificial fixed income market which has accelerated in a world of QE and ZIRP. However we also show that the benign default environment post crisis has been helped by relatively steep yield curves (YC). Default cycles have often been linked to the ebbing and flowing of the YC through time with a fairly long lead/lag (30 months). When YCs are steep, as they were immediately post crisis, it signals an attractive carry risk/reward profile ahead for investors/banks. Our model now shows rising but still below average default rates well into 2017.

However there are warning signs ahead. The YC has been flattening steadily in the US and more dramatically in Europe. A perfect default storm could be created for 2018 if the Fed then compounds this by raising rates in 2015/16. This could create a much flatter YC over the next year if the long-end reacts more to rock bottom European yields, low inflation, a shortage of high quality assets or fears of a Fed policy error. What happens next with the Fed and the curve could create the next default cycle in 2017/18. One sector with nearer-term default risk is US Energy. Our US strategists discuss how a third of all US HY Energy Single-Bs and CCCs are at risk of some form of debt restructuring with oil prices around these levels for a few quarters. For the full report with all the usual charts and tables as to where spreads are relative to default risk please see the note in your inbox around an hour before this one.

Moving onto markets this morning, China is the main focus after Q1 GDP fell in line with expectations at 7.0% yoy. Other data indicators were soft however. Retail sales (10.2% yoy vs. 10.9% expected), industrial production (5.6% yoy vs. 7.0% expected) and fixed asset investment (13.5% vs. 13.9%) were all below market. The GDP reading is the lowest since 2009. After all the data Chinese equities have been volatile, initially rising +0.6% with the hope of more stimulus on the horizon, before then selling off. The Shanghai Comp (-1.11%) and CSI 300 (-0.85%) are both currently lower as we go to print but could have changed again by the time you read this. Bourses elsewhere are lower also. The Nikkei (-0.10%), Hang Seng (-0.05%) and ASX (-0.61%) falling along with the AUD (-0.47%). Elsewhere, news that the Central Bank of Sri Lanka has cut benchmark rates by 50bps to 7.5% means that they are now number 47 on our list of countries easing in 2015 (counting Europe as 19 countries).

Before we look at markets elsewhere, yesterday also saw the release of the 4th edition of DB’s "Random Walk" annual survey of global prices. The piece is a compilation of prices and price indices from countries and cities around the world to provide a reasonably good map of global prices. The team highlight in this year’s survey the extent to which exchange rate movement’s impact relative prices across countries. In previous years, Australia had consistently been the world’s most expensive country while the United States had been the cheapest developed country. This year, however, the strength of the USD has significantly narrowed the gap between the two. Similarly, shopping in Europe and Japan now feels a lot cheaper than before. In interesting other findings the team note how despite the USD appreciation, the United States remains the cheapest place to buy an i-Phone 6 and, barring India and Canada, it is also the cheapest place to buy a pair of Levi’s 501. For watching a movie the team recommend readers try Mumbai, Delhi and Kuala Lumpur but avoid Zurich (and also to avoid Zurich if you want a hair-cut - not a problem for me) whilst for a quick weekend getaway, Sydney, Paris and London remain the most expensive whilst Mumbai and Delhi are the cheapest. Indian cities are also the cheapest places to go out on a date.

Back to markets, corporate earnings and macro data yesterday provided much of the direction as the S&P 500 (+0.16%) and Dow (+0.33%) eventually pared back earlier losses to close higher while European equity markets finished largely in the red as the Stoxx 600 (-0.47%) and DAX (-0.90%) fell. Better than expected corporate earnings out of both JP Morgan and Johnson & Johnson before the open initially helped lift sentiment, however these modest gains were quickly wiped out following the March retail sales print out of the US. Both the headline (+0.9% mom vs. +1.1% expected) and core (+0.5% mom vs. +0.6% expected) came in below market, causing the S&P 500 to sell off and eventually strike an intraday low of -0.5%, before a rally in energy stocks (+1.77%) helped drag the index back into positive territory as WTI (+2.66%) and Brent (+0.86%) closed higher.

Delving deeper into yesterday’s data and retail sales in particular, the retail control component (which is a direct input into GDP) was also weaker than expected at +0.3% mom (vs. +0.5%) expected. Our US colleagues noted that for the quarter, retail control actually declined at a -0.7% annualized rate which was the worst performance since Q2 2009. Inflation-adjusted, the reading was slightly better (unchanged) but still the weakest since Q2 2012. As well as the weakness in retail sales, the NFIB small business optimism survey was also weak, declining 2.8pts to 95.2 and the lowest reading since June. Other second tier releases offered few surprises as business inventories (+0.3% vs. +0.2% expected) and PPI (-0.8% yoy vs. -0.9% expected) both came in a touch higher than expected.

There was a similar move in US Treasuries post the data, as the benchmark 10y yield, having hovered around 1.920% pre-release fell to an intra-day low of 1.853% before eventually closing nearly 3bps down on the day at 1.899%. The Dollar ended its run of 6 consecutive positive sessions as the DXY closed down 0.76%. Meanwhile, Fed Funds expectations fell. The Dec 15 (-1.5bps), Dec 16 (-1.5bps) and Dec 17 (-5.5bps) contracts all fell to 0.35%, 1.00% and 1.56% respectively. In fact, the contracts are now 22bps, 45bps and 50bps off their highs in yield from early March. Finally, the latest Atlanta Fed GDPNow was unchanged following yesterday’s data at +0.2% for Q1, however this still sits well below the bottom end of the range of consensus forecasts which overall averages 1%.

The weaker data in the US appeared to play its part in European markets also, although more headlines around Greece most probably contributed. We’ll come to those shortly, however yesterday’s weaker tone helped support further strength in core bond markets as 10y yields in Germany (-1.9bps) and France (-2.5bps) extended gains. In fact, yesterday saw the 8y Bund close 1.8bps lower taking it -0.008% in yield. That move now means that the Bund curve is trading in negative territory up until the 8y maturity with 9y (0.052%) and 10y (0.136%) yields creeping closer now.

It was fairly quiet data-wise in the region with just a strong industrial production (+1.6% yoy vs. +0.8% expected) out. However over in the UK, yesterday’s CPI data offered few surprises with the headline coming in at 0.0% yoy as expected. Unrounded we actually dipped into YoY deflation for the first time since 1960 but this won't make the headlines. The core weakened further to +1.0% yoy (vs. +1.2% expected) – reinforcing the more consensus view now that a 2015 rate hike looks unlikely. Gilts tightened across the curve, although led by the 10y in particular which closed 7.9bps lower at 1.513%.

Back to Greece, headlines that European officials have indicated a deal is unlikely to be reached by the April 24th Eurogroup meeting attracted attention. According to German press Handelsblatt, EC Vice-President Dombrovskis said that the EU is unlikely to agree to Greek aid this month given the lack of readiness by authorities to reform pension and labour markets. EU ministers will instead take stock of progress according to the report. Warning signs were also sent from the ECB’s Knott who warned that a default for Greece may have a contagion effect, particularly in the event of an un-hoped for bankruptcy. The IMF’s Blanchard warned that, unsurprisingly, more work still needs to be done and that a ‘crisis that would unsettle financial markets can’t be ruled out’.

Turning to the day ahead, German inflation will provide much of the focus this morning with the final March reading due while in France we also get the preliminary CPI print. The ECB meeting is also scheduled for later in the day. Over in the US this afternoon, we’ve got empire manufacturing, industrial production, manufacturing production, capacity utilization and the NAHB housing market index all due.