With the "adult supervision" of US markets gone today as bond markets are closed for Columbus day, and the USDJPY tractor beam also missing with Japan also offline for Health and Sports day, stocks took their cues from China where speculation was rife that in lieu of cutting RRR, the PBOC has unleashed even more incremental QE by expanding its Collateral Asset Refinancing Program (CAR). Specifically, the central bank said this weekend it will expand a program allowing lenders to use loan assets as collateral for borrowing from the central bank, opening it up to nine more cities from the program's test in Shandong province and Guangdong. The new areas for the program include Beijing and Shanghai. According to some estimates released several trillions in liquidity into the market, and not only sent government bond futures to new highs, but pushed the Shanghai Composite up over 3% overnight.
With both Japan and Europe on QE boost hiatus, many said it was only a matter of time before China steps in. According to the WSJ, "The market has widely interpreted the move as China's version of quantitative easing," said Jacky Zhang, an analyst at BOC International.
However, while Chinese stocks were bought first, with questions and half-baked goalseeked opinions either coming later or not at all, Market News explained that while Chinese markets surged on Monday as investors bought into talk that China's quantitative easing is finally here "traders with commercial banks who could be expected to benefit from the new program were dismissive, saying the PBOC is simply opening up another channel to provide liquidity to the market and cautioning that the popularity of this latest one will be limited."
"This is definitely not QE. What happens here is the PBOC allows more assets to be used as collateral when banks borrow from it while QE involves the central bank buying assets -- it's completely different," said a Beijing-based bank official with one of the "Big Four" state-owned banks.
"Markets are up because of this PBOC move. This kind of information, because it's vague and uncertain, provides room for people's imaginations and it can have a big impact," said Yan Yan, a bond analyst with Guangdong Development Bank.
Well, semantics, but with central banks the verbal transmission channel is key. However, as MNI also correctly notes, the bigger issue isn't one of liquidity. Instead, it's the fact that there's little demand for yet more credit in China's overstretched, overbuilt and over-indebted economy. Expanding a loan collateral program isn't going to fix that. "In the past 18 months, the impact of PBOC easing on lending activity has hardly been satisfying - the key here is loan demand, not supply," said a trader with bank based in eastern China.
The irony is that while QE is meant to crush one's currency, China has been scrambling to defend it following its surprising devaluation, and even as it desperately seeks to boost its credit and risk asset bubble, it is trying to push its currency higher, leading many to ask whether China even understands what the premise behind direct central bank intervention truly is.
So while China's "maybe QE" helped Chinese risk assets, it has done little for US equity futures, which over the past week have seen their biggest weekly surge in years, precisely on expectations that the Fed itself has put off its own rate hike indefinitely and may instead proceed straight to QE4 or NIRP as we have speculated for over a year.
A quick check on the key global markets in today's subdued session shows Asian equity markets traded mostly higher in a thinly traded session as Japanese participants were away for Health and Sports day, while Columbus Day in the US also contributed to the quiet tone. The Shanghai Comp (+3.3%) extended on last week's gains, following comments from PBoC deputy Governor Yi that volatility in the markets have ran their course and additional measures are to be implemented to restore function to the markets. Furthermore Shanghai margin debt balance rose for the 2nd day, and of course, the abovementioned reports of the PBOC finally launching its own QE (which in any event is just a matter of time).
The German DAX index outperformed its EU peers following reports that RWE (+10.5%) and EON (+8.0%) have enough money in order to cover the clean-up costs of nuclear power plants. As a result, utilities led the move higher, with energy sector on the back foot as analysts at Goldman Sachs reiterated their bearish call on commodities and cut price target for WTI. On the other hand, shares of the troubled mining and trading company Glencore (-0.8%) failed to benefit from reports of further asset disposals and instead traded lower. In part this was in reaction to FT reporting that Rio Tinto will not cut copper production and instead will look to increase it, in hope that higher cost producers will go bust.
Given the lack of scheduled tier 1 releases, as well as the fact that US market participants are observing the Columbus Day holiday meant that trade volumes were below average. In turn this resulted in a relatively range bound price action by Bunds, with peripheral bond yield spreads also little changed.
In commodities, the week has started off with a continuation of the recent trend higher, befitting form the weaker USD. Despite bearish comments coming out of Goldman Sachs on commodities, the likes of Brent and WTI crude futures head into the North America crossover in positive territory, while gold is higher on the day by around USD 10.00 to trade around its highest levels since August 24th as US participants arrive at their desks.
In FX despite the bearish call by analyst at Goldman Sachs on commodities, high yielding and commodity sensitive currencies such as AUD, CAD and RUB traded firmer, with AUD/USD moving above the 100DMA line, while spot RUB fell below the key technical level. Elsewhere, CNH has seen its best one day performance since March and is at a 2 month high against the USD; this comes as PBoC gave a stronger fixing as well as inline with recent strength in equities and suggestions that major Chinese lenders were offloading USD in order to push up the exchange rate. BBDXY -0.18% at 1,190.26; earlier touched 1,189.83 3-wk low
A number of ECB members have spoken over the weekend and while Draghi again noted preparedness to expand the QE program if warranted, other members including Lautenschlager, Weidmann and Coeure has refrained from leaning towards further easing, which comes in spite of a raft of less than impressive macroeconomic data, especially from Germany. Of note many analysts had forecast an expansion to QE before the end of the year, with just two meetings left this year, one next week and one in December.
There is no data on the US docket, which as noted is on Columbus Day holiday, instead the focus of whoever is in the office will be on even more confusion spread by Fed members Brainard, Evans and Lockhart all set to speak later today.
Bulletin Headline Summary from RanSquawk
- The German DAX index outperformed its EU peers following reports that RWE and EON have enough money in order to cover the clean-up costs of nuclear power plants.
- High yielding and commodity sensitive currencies such as AUD, CAD and RUB outperform today, bolstered by further commodity strength
- Today's Columbus Day holiday sees a lack of tier 1 data, however comments are scheduled from Fed's Lockhart, Evans and Brainard
DB's Jim Reid completes the overnight recap
There’s plenty to keep our eyes open for this week after a slow start not helped by Columbus Day in the US today with the bond market closed. After this US earnings season starts to hot up and will be even more closely watched than normal for any signs of a domestic and international slowdown. The banks are the highlight this week with a selection of those reporting mentioned in the week ahead at the end. Elsewhere, China trade data tomorrow, CPI around the world on various days and US retail sales on Wednesday are the key releases. The full roster is at the end.
Most of the weekend headlines have been focused around the annual IMF meeting in Peru. Of particular note were the comments from Fed Vice-Chair Fischer who acknowledged that he was in the camp in September expecting a Fed rate hike this year, but signalled that ‘both the timing of the first rate increase and any subsequent adjustments to the federal funds rate target will depend critically on future developments in the economy’. Fischer highlighted that there are ‘considerable uncertainties’ around the US economic outlook, while noting also that the recent US jobs report was ‘disappointing’. Fischer went on to say that the Fed has to ‘remain cognisant of the risks ahead’.
Speaking early Saturday morning in Peru, ECB President Draghi said that while he is so far satisfied with the ECB’s QE program, he highlighted that it presently appears that it will take somewhat longer than previously anticipated for inflation to come back, and stabilise around, levels sufficiently close to 2%. Commenting on China, Draghi was noted as saying that the Chinese authorities were reassuring on the growth outlook for the economy. Meanwhile, the WSJ is running a story this morning, quoting a number of EM Central Bankers as urging the Fed to get on with raising rates in the hope that the uncertainty and volatility, which has been an overriding theme for emerging markets in particular of late, will dissipate somewhat.
In terms of markets, after a modest return on Friday (+0.07%), the S&P 500 capped its best week of the year having returned +3.26% over the past five days, with the index now posting positive returns in eight out of the last nine sessions. Oil markets had a decent week too with WTI (+8.98%) seeing its best performance in six weeks, while it was also a decent week across much of the commodity complex with Zinc (+8.96%) in particular surging the most last week in nearly four years, helped by the news of production cuts out of Glencore. Aluminium (+3.53%) and Copper (+3.82%) had their best week in six and four weeks respectively.
Markets in Asia have kicked off the week on the front foot, with gains across equities being led out of China in particular. The Shanghai Comp (+3.38%), CSI 300 (+3.53%) and Shenzhen (+4.12%) have all seen decent gains and extended the strong run since bourses reopened after Golden Week, while the Hang Seng (+1.36%) and Kospi (+0.25%) are also up in early trading. Markets in Japan are closed for a public holiday, but it’s been a softer start for equity markets in Australia with the ASX down -0.81%. It’s been a quieter start in credit markets, with indices generally unchanged to a couple of basis points wider. Oil is off to another strong start meanwhile, with WTI (+0.89%) passing the $50/bbl level again this morning.
As well as Fischer’s comments over the weekend, there was plenty of Fedspeak on Friday too for markets to digest with the majority still pushing for a move this year, but with more and more warning signs creeping in. Atlanta Fed President Lockhart, seen as something of a centrist, kicked things off by reiterating that he continues to see the Fed lifting off at either the October or December meeting, but at the same time noting there is more ambiguity in the current moment relative to a few weeks ago, while the latest US jobs report highlighted that there is ‘a touch more downside risk’ to the US economy. He was then followed by the NY Fed President Dudley who also said that he is expecting a rate rise this year, but noting that the ‘economy is downshifting a little bit’ and that ‘inflation is below our objective’, while pointing out that his view is not a commitment, highlighting that we’re set to get a lot of data between now and December. Meanwhile, the Chicago Fed’s Evans continued to emphasize his dovish view, saying that a delay in Fed liftoff until mid-2016 and then a gradual path thereafter ‘would be consistent with us getting inflation back up to 2% within a reasonable period of time’.
The US dataflow had generally little impact on markets on Friday. The September import price index reading, while still soft, was slightly better than expected at -0.1% mom (vs. -0.5% expected), in turn helping to raise the annualised rate to -10.7% yoy (from -11.3%). Wholesale inventories for August were a tad above expectations (+0.1% mom vs. 0.0% expected) but trade sales (-1.0% mom vs. -0.4% expected) were below consensus. That slight softness in the wholesale trade report saw the Atlanta Fed cut their Q3 GDP forecast a tenth to 1% and is now some way off the 1.8% forecast we saw back in late September. 10y Treasury yields nudged down 1.6bps to 2.089% while the Dollar weakened, with the Dollar index down half a percent. Fed hike pricing remained at largely unchanged levels, with December a shade below 40% and March at 62%.
Closer to home, the rally across European risk assets continues, with strength in the miners in particular helping the Stoxx 600 (+0.33%) finish up for the sixth day on the trot. It’s a similar story in credit markets too as Crossover closed 13bps tighter and is now nearly 60bps off the wides of earlier this month. Data out of France was solid with both industrial production (+1.6% mom vs. +0.6% expected) and manufacturing production (+2.2% mom vs. +1.0% expected) surprising to the upside, although the same could not be said for Italy which saw IP drop more than expected in August (-0.5% mom vs. -0.3% expected). DB’s Marco Stringa noted that the SIREN-Momentum indicator dropped to the lowest value in almost a month mainly due to the recent Germany industrial data, Spain’s September PMIs and to a lesser extent Spain’s August IP.
On to this week’s calendar now. It’s a very quiet start to the week today with no data releases due in either Europe or the US and with bond markets in the latter closed for Columbus Day. The focus instead will likely be on the Fedspeak with Brainard, Evans and Lockhart all due to speak.
