Just as the S&P appeared set to blast off to a forward GAAP PE > 21.0x, here comes Greece and drags it back down to a far more somber 20.0x. The catalyst this time is an FT article [49]according to which officials of now openly insolvent Greece have made an informal approach to the International Monetary Fund to delay repayments of loans to the international lender, but were told that no rescheduling was possible. The result if a drop in not only US equity futures which are down 8 points at last check, but also yields across the board with the German 10Y Bund now just single basis points above 0.00% (the German 9Y is now < 0), on its way to -0.20% at which point it will lead to a very awkward "crossing the streams" moment for the ECB.
Oil is lower as well because also overnight we learned that the recent surge in crude prices is precisely what Saudi Arabia wanted to boost production to a new record high. with March production up another 659k b/d to 10.29m b/d (a fresh all time high) amid slower growth forecast for non-OPEC supply and better global demand outlook, OPEC says in its monthly Oil Market Report. "Higher global refinery runs, driven by increased seasonal demand, along with the improvement in refinery margins, are likely to increase demand for crude over the coming months." And the Saudis will do everything in their power power to paint the streets black... and slick.
As a result, European equities entered negative territory with the DAX earlier breaking below yesterday's low as ECB positions are unwound and concerns surrounding Greece continue to linger with discussions between Greece and the IMF set to begin today. The ongoing uncertainty has resulted in the short end of the Greek yield curve to climb, with 3y and 5yr yields both surging over 100bps. Furthermore, S&P downgraded Greece’s credit ratings to CCC+ from B-; outlook negative, while German Finance Minister Schaeuble downplayed expectations for a breakthrough in Greek/Eurogroup negotiations by saying ‘nobody expects that there will be a solution.
Shortly after the Eurex open flows were seen into fixed income and Bund futures caught a mild bid which led to the German 10y and 30y yield fell below 0.1% and 0.5% respectively for the first time in history, meanwhile UST’s trade slightly higher tracking its German counterpart.
Asian investors had no Greek headlines, or fundamentals to worry about, and as a result Asian stocks mostly rose led by energy stocks following yesterday’s rally across the energy complex. Shanghai Comp (+2.7%) outperformed after peaking near its 7yr highs, as yesterday’s declines and continued easing speculation triggered a round of fresh buying. Hang Seng (+0.4%) also rose after erasing earlier losses bolstered by a rally across railway stocks. Nikkei 225 (+0.1%) was the session’s laggard weighed on by a strong JPY, strengthening the most this month against the greenback.
In FX markets, the USD-index has begun to retrace some of yesterdays’ US Empire & Industrial Production inspired losses which has weighed on the EUR, with EUR/GBP breaking back below the low printed yesterday at 0.7167. Elsewhere, GBP/USD trades steady with attention turning to tonight’s UK Election debate which will be close watched as the market looks to observe any impact on the latest election polls. AUD strengthened the most in 3-weeks and outperforms its major pairs in the wake of a stellar Australian employment report, which prompted participants to pare May RBA rate cut calls. Unemployment rate fell to a 3-month low as the participation rate rose to an 8-month high, with the headline reading more than double expectations (37.7k vs. Exp. 15.0k (Prev. 15.6k, Rev. 42.0k). As such, markets are now pricing in a 56% chance of a 25bps May RBA rate cut vs. 74% prior to the report.
In the energy complex, WTI and Brent crude futures are unable to hold onto the gains seen after the DoE and API crude inventories data with overnight comments from the Iraqi oil minister Mehdi stating that oil exports should reach a record 3.1mln bpd in April as output from the country's southern fields stays strong and weather conditions improve. In precious metal markets, spot gold trade firmer above the USD 1200/oz level as yesterdays’ lacklustre US data continues to add to the risk off sentiment observed in the market.
In summary: European shares fall, though are off intraday lows, with the media and chemicals sectors underperforming and autos, resources outperforming. European car sales rose 11% in March. The Spanish and German markets are the worst-performing larger bourses, the Dutch the best. The euro is weaker against the dollar. German 10yr bond yields fall; Greek yields increase. Commodities decline, with natural gas, Brent crude underperforming and copper outperforming. U.S. jobless claims, continuing claims, Bloomberg consumer comfort, Bloomberg economic expectations, Philadelphia Fed index, housing starts, building permits due later.
Market Wrap
- S&P 500 futures little changed at 2099
- Stoxx 600 down 0.2% to 413.2
- US 10Yr yield up 0bps to 1.89%
- German 10Yr yield down 2bps to 0.09%
- MSCI Asia Pacific up 1.1% to 154.3
- Gold spot up 0.2% to $1205.6/oz
- Eurostoxx 50 -0.6%, FTSE 100 -0.1%, CAC 40 -0.2%, DAX -0.7%, IBEX -0.8%, FTSEMIB -0.3%, SMI +0%
- Asian stocks rise with the Shanghai Composite outperforming and the Sensex underperforming.
- MSCI Asia Pacific up 1.1% to 154.3; Nikkei 225 up 0.1%, Hang Seng up 0.4%, Kospi up 0.9%, Shanghai Composite up 2.7%, ASX up 0.7%, Sensex down 0.7%
- Euro down 0.43% to $1.0638
- Dollar Index up 0.3% to 98.62
- Italian 10Yr yield up 4bps to 1.3%
- Spanish 10Yr yield up 3bps to 1.3%
- French 10Yr yield down 2bps to 0.34%
S&P GSCI Index down 0.2% to 429.8 - Brent Futures down 1% to $62.7/bbl, WTI Futures down 0.7% to $56/bbl
- LME 3m Copper up 1.2% to $6029/MT
- LME 3m Nickel up 0.9% to $12790/MT
- Wheat futures up 0.1% to 489.3 USd/bu
Bulletin Headline Summary from Bloomberg and RanSquawk
- European equities reside in negative territory and German 10yr and 30yr yields print fresh record lows as the 10y yield falls below 0.1%
- Looking ahead, sees the release of US Initial Jobless Claims, Housing Starts, Building Permits, Philadelphia Fed Business Outlook, EIA NatGas storage change, UK party elections debate as well as a loaded speaker slate featuring the likes of Fed’s Lacker, Lockhart, Mester, Rosengren and Fisher
- Treasuries steady overnight as 10Y yields of Germany, France, Belgium, Netherlands, Austria, Finland and Ireland declined to record lows yday and French 30Y yield fell below 1% for first time.
- The average yield on German government debt dropped below zero for the first time, an indicator of how the ECB’s bond-buying program has made the previously unthinkable a reality
- For Norway’s $890 billion sovereign-wealth fund, the investment risks stemming from monetary policy have never been greater
- U.K. bond investors have bigger concerns than who wins the election on May 7, with the past five years showing that central bankers, not politicians, hold power for financial markets
- Ben Bernanke will become a senior adviser to the Citadel Investment Group, he will offer his analysis of global economic and financial issues and meet with investors
- Fed will only know demand for its O/N RRP facility once it starts to move away from the zero bound; usage could stay steady or be “much greater than what we’ve seen at higher levels of interest rates,” Simon Potter, executive vice president at the New York Fed, said in speech
- Sovereign bond yields mixed with Greek 10Y yields rising 77bps. Asian stocks rise, European equities drop, U.S. equity-index futures fall. Crude oil drops, copper and gold higher
US Event Calendar
- 8:30am: Housing Starts, March, est. 1.040m (prior 897k)
- Housing Starts m/m, March, est. 15.9% (prior -17%)
- Building Permits, March, est. 1.081m (prior 1.092m, revised 1.102m)
- Building Permits m/m, March, est. -1.9% (prior 3%, revised 4%)
- 8:30am: Initial Jobless Claims, April 11, est. 280k (prior 281k)
- Continuing Claims, April 4, est. 2.323m (prior 2.304m)
- 10:00am: Philadelphia Fed Business Outlook, April, est. 6.0 (prior 5)
Central Banks
- G-20 Finance Ministers, Central Bankers meet in Washington
- 1:00pm: Fed’s Lockhart speaks in West Palm Beach, Fla.
- 1:10pm: Fed’s Mester speaks in New York
- 1:30pm: Fed’s Rosengren speaks in London
- 3:00pm: Fed’s Fisher speaks in Washington
DB's Jim Reid concludes the overnight recap
In our 2013 long-term study "A Nominal Problem" we highlighted how one of the biggest concerns facing the global economy was how low Nominal GDP was relative to the past. Well this problem has intensified across most of the world over the last couple of quarters and China is a prime example. In the pdf today we show that Chinese NGDP is back down (5.7%) to within 0.1% of where it was at the lows in Q1 2009. While QE and ZIRP around the world is clearly keeping the 'plates spinning' successfully in terms of financial markets, policy is being less successful in promoting growth (real or nominal). This is important as the longer NGDP stays low the longer extremely high debt burdens will remain and even increase and the more vulnerable the economy stays to an outside shock. China's low NGDP also must have an impact on their external demand which in turn impacts the rest of the globe. So difficult times still for growth but perhaps allowing more financial market stimulus ahead.
Our Chinese economist Zhiwei Zhang also highlights how outside of the main releases, other non-mainstream numbers such as electricity production growth dropped to -0.1% yoy (Jan-Feb: 1.9%, 2014: 3.2%). Elsewhere cement output growth dropped to -20.5% (Jan-Feb: 11.2%, 2014: 1.8%) and the number of migrant workers dropped 3.6% yoy in Jan-Feb. Zhiwei maintains his view that China faces the risks of a mini-hardlanding, and the government will have to loosen policies significantly in Q2 to stabilize growth. He now expects three more RRR cuts in the rest of this year, with two in Q2 and one in Q3. They also continue to expect one interest rate cut in Q2, but see the possibility of more cuts in H2 should the economic growth continue to disappoint.
The Shanghai Comp and CSI 300 are rebounding +1.95% and +2.33% this morning respectively, no doubt helped by stimulus hopes after the poor data. Elsewhere, the Nikkei (-0.19%) is lower and the Hang Seng (+0.20%) is a touch higher. The ASX (+0.55%) is higher after Australia reported better than expected employment data.
Staying with stimulus the ECB reiterated that they see no imminent problems in sourcing bonds in their QE program and continue to expect it to be ongoing until inflation shows clear signs of meeting their objectives. In response the 10 year bund countdown to zero hit a new landmark as it dropped another 3bps to trade at 0.105% yesterday. Other Euro Govt bond yields dropped broadly similar amounts with the peripheral generally slightly out-performing as 10y yields in Spain (-2.9ps), Italy (-4.7bps) and Portugal (-5.2bps) dropped to 1.257%, 1.256% and 1.686% respectively.
Draghi’s comments certainly helped the better tone in markets yesterday, however it was a rally in oil markets which again provided much of the direction for risk assets and helped offset more soft data out of the US and more negative comments out of Greece, which we’ll come to shortly. Indeed, the S&P 500 (+0.51%) and Dow (+0.42%) both rose for the second consecutive day as energy stocks (+2.30%) rallied in line with a rise for WTI (+5.82%) and Brent (+5.87%). The rally in WTI in fact to $56.39/bbl marked the highs for 2015 so far, with the price now over $10 off the 6-year lows we saw roughly a month ago. The latest bounce appears to be as a result of the latest EIA data showing crude supplies increasing last week at the slowest pace since January.
Greece was the other notable headliner yesterday as comments from German Finance Minister Schaeuble in particular attracted attention. Having downplayed earlier reports in German press Die Zeit that the German government was working on a plan to keep Greece in the Euro-area if the country defaulted, Schaeuble went on to say that ‘no one’ expects a solution for Greece at the Eurogroup meeting next Friday and that the current government in place has ‘destroyed’ previous progress. Data released yesterday also showed that Greece missed its +1.5% budget surplus target for 2014 after posting +0.4%. S&P became the latest credit agency to act, downgrading Greece one notch to CCC+ (negative outlook).
Back to markets, Treasuries were fairly unmoved for the most part yesterday as the benchmark 10y yield in particular traded in a tight range before eventually closing a basis point tighter at 1.889%. The Dollar was weaker meanwhile as the DXY closed 0.40% lower. Yesterday’s data did little to help. In particular, the April print for the NY Fed empire manufacturing (-1.19 vs. +7.17 expected) was a significant miss - dragged down by new orders in particular – and more or less in line with the 18 month low seen back in December. Industrial production (-0.6% mom vs. -0.3% expected) was also soft having fallen more than expected for the biggest fall since August 2012. Manufacturing production makes for modestly better reading however with the +0.1% mom reading in line and up from (-0.2%) last month. Elsewhere, the NAHB housing market index rose 3pts to 56 and capacity utilization was more or less in line (78.4% vs. 78.6% expected)
There was little to surprise markets following the release of the Fed’s Beige book yesterday. The release showed that the economy grew at a ‘modest’ or ‘moderate’ pace in eight of the twelve regions from Mid February to end March. References to a harsh winter was unsurprisingly a theme, which, combined with a stronger Dollar and falling oil prices was blamed as the cause for weakening activity. Labour markets were said to be ‘stable or continued to improve modestly’ however the Districts reported only ‘modest’ upward wage pressure. On the subject of the Fed, St Louis Fed President Bullard (non-voter) was vocal again yesterday, this time highlighting the risk of asset price bubbles should rates be left near zero for too long.
Before we move on, a WSJ article out late last night caught our eye. In it, former Fed Chair Bernanke was quoted as saying that the control of monetary policy ‘might be more, rather than less effective’ should the Fed move away from the target Fed Funds rate and instead focus on the repo rate in a bid to maintain a larger balance sheet than before the crisis. Bernanke highlighted that the fed funds market is ‘small and idiosyncratic’ and noted that regulatory action should help ease wariness around reverse repo programs.
Moving on, as well as the strength in bond yields in Europe yesterday, equities also maintained their strong run as the Stoxx 600 (+0.57%) recorded a fresh record high while the DAX (+0.03%,) CAC (+0.70%), IBEX (+0.63%) and FTSE MIB (+1.17%) all finished higher. Despite a brief hold up from the invasion of a protestor, Draghi’s comments that there is ‘clear evidence that the monetary policy measures that we’ve put in place are effective’ and that ‘we expect the economic recovery to broaden and strengthen gradually’ certainly helped support confidence in markets. Elsewhere, the final March inflation reading out of Germany was unchanged at +0.3% yoy, while France stayed in deflation mode after its -0.1% yoy reading came in a touch below expectations of 0.0%.
The IMF’s Global Financial Stability Report was also released yesterday. In it, IMF Director Vinals warned of a ‘super taper tantrum’ and rising bond yields in the face of a first rate rise from the Fed. The report suggested that a 100bps rise in 10y Treasuries was ‘quite conceivable’ upon a move by the Fed, while ‘shifts of this magnitude can generate negative shocks globally, especially in emerging market economies’.
Looking at today’s calendar, it’s quiet in the European timezone this morning with no significant releases due out. Focus will again be on the US data where we get housing starts, building permits, initial jobless claims and the Philadelphia Fed business outlook. It’s a busy day for Fed commentary also where we have Lacker, Lockhart, Mester and Fischer all due to speak. Earnings season will of course remain a focus as well with Goldman Sachs, Citigroup and Schlumbeger due to report – an interesting contrast between the financial and energy space