Nikkei

An overview of the technical condition of the major currencies. See why we anticipate a heavier US dollar in the week ahead.

Those wondering why the overnight ramp has not yet materialized despite promises from BOJ's new governor Kuroda to openly-endedly monetize Fukushima radiation if necessary in order to reflate the economy, will have to look at Europe where a raft of horrifying PMIs confirms what most have known: the relapse into a multi-dip European recession is progressing nicely, and the hoped for rebound in the core economies of France and Germany is once again on track to not happen, but at least there will be Cyprus to blame it all on this time. The specific reason this time was French and German Flash Manufacturing and Services PMI for March, all of which came far below expectations: German Mfg PMIs printed at a contracting 48.9 vs Exp. 50.5 (back from 50.3), while Services came at 51.6, down from 54.6 on expectations of a rise to 55.0, while French Mfg PMI stayed stubbornly flat at 43.9, despite hopes of a "bounce" to 44.3, even as the Service number ticked even lower from 43.7 to 41.9, below expectations of 44.3 and the lowest since February 2009. End result: Eurozone March Services PMI down from 47.9 to 46.5, vs Exp. of 48.2, while Manufacturing slid from 47.9 to 46.6 on hopes and prayers of a bounce to 48.2. Which then takes us back to Cyprus, where things are not fixed yet, where the parliament is not expected to vote for a revised Bailout proposal yet, and where we got a cornucopia of brilliant one liners, such as these from the new Eurogroup head, who is filling in the shoes of his predecessor Juncker in style, and proving quite well that "things are serious."

But wait - some regurgitated news from Japan of 'moar easing' and EURJPY ramps to pull S&P futures up to pre-Cyprus levels...

*BANK OF JAPAN GOV TO CALL FOR 'BOLD EASING,' NIKKEI SAYS

You have to wonder when no-news from the BoJ trumps no-news from the Fed in stirring S&P to move (but success as the S&P maaged to finally close the Cyprus gap)... We can't help but wonder who decided that at 2:05am Japan time this non-news algo-pumping headline should be released?

Not even the usual monthly futures panacea (which in fact manages to fool the entire centrally-planned market twice every month, all the time), the always rising German ZEW Economic Sentiment survey, which mysteriously did not come at an all time high, but still rose from February's 48.2 to 48.5, despite expectations of a decline to 48.1, has managed to push the EUR higher in overnight trading, as a result keeping a lid on any of the generic no-volume futures levitation we have all grown to love. The reason is not that concurrently with the German data we got abysmal Eurozone Construction Output data, which plunged -7.3% Y/Y, the most in four months, following a slump in French and Spanish activity offsetting the German "confidence-boosting economic miracle" but simply because there continues to be no clarity whatsoever on events in Cyprus, where as noted earlier, the parliament may vote as soon as 6 hours from now to veto the proposed deposit confiscation "bailout/in" plan, which could lead to the first Eurozone banking system collapse, and the first expulsion of a member Eurozone nation, setting the wheels in motion for the unthinkable.

Given FX markets are double-dipping now, it is little surprise that S&P 500 futures open down 16 points from the 1553.5 close on Friday - a one-week low. This is the biggest close-to-open gap down since May 2012. Treasury Futures just opened implying a 1.94% 10Y (-5bps) and 3.16% 30Y (-5bps). And despite the USD strength, spot gold just opened also up from $1591.95 to $1607. The arb against JPY carry is holding stocks for now... only another 8 hours until Europe opens... Over 38,000 contracts have traded in S&P 500 futures in the first 5 minutes ($2.9bn notional) - 30 times the average for a Sunday night... The initial dump was caught by a VWAP reverter but that is fading now... Japan's NKY looks set to open down around 500 points or so given JPY's strength.

"Equity prices in the US and Europe have been hovering at multi-year highs. To the extent that this reflects powerful policy easing, equity markets may have lost some of its ability to reflect economic trends in exchange for an important role in the policy fight to support spending." This is a statement from a Bank of America report overnight in which the bailed out bank confirms what has been said here since the launch of QE1 - there is no "market", there is no economic growth discounting mechanism, there is merely a monetary policy vehicle. To those, therefore, who can "forecast" what this vehicle does based on the whims of a few good central planners, we congratulate them. Because, explicitly, there is no actual forecasting involved. The only question is how long does the "career trade", in which everyone must be herded into the same trades or else risk loss of a bonus or job, go on for before mean reversion finally strikes. One thing that is clear is that since news is market positive, irrelevant of whether it is good or bad, virtually everything that has happened overnight, or will happen today, does not matter, and all stock watchers have to look forward to is another low volume grind higher, as has been the case for the past two weeks.

If the last three days were spared an overnight ramp in US futures, today this has not been the case as the new carry pairs of choice, the USDJPY and EURJPY, have seen constant gradual levitation overnight, pushing the correlated US OTC markets higher and setting the stage for the tenth consecutive, and perfectly artificial, Dow Jones increase. It is notable just how broken the old direct EURUSD-ES correlation is in times when correlation desks can offset selling pressure by shorting Yen and obtain local funding. That said, even the USDJPY appears to have stalled out in the low/mid 96 range - it is unclear what the catalyst pushing the Yen much lower will be, as virtually all rhetorical ammunition used by the BOJ and its affiliates, has by now been well and truly used up, and the daily talkdown sessions are merely a regurgitation of previous talking points.

Here is a quick overview of what is going on. Besides reviewing the key developments, we explain why the EU Summit, which is not attracting much attention, is in fact important.

This is the third day in a row that an attempt to mount an overnight ramp out of the US has fizzled, with first the Nikkei closing down for the second day in a row and snapping a week-long rally, and then the Shanghai Composite following suit with its 5th consecutive drop in a row as the rumblings out of the PBOC on the inflation front get louder and louder, following PBOC governor Zhou's statement that inflation expectations must be stabilized and that great importance must be attached to inflation. Stirring the pot further was SAFE chief Yi Gang who joined the Chinese chorus warning against a currency war, by saying the G20 should avoid competitive currency devaluations. Obviously China is on the edge, and only the US stock market is completely oblivious that the marginal economy may soon force itself to enter outright contraction to offset the G-7 exported hot money keeping China's real estate beyond bubbly. Finally, SocGen released a note last night title "A strong case for easing Korean monetary policy" which confirms that it is only a brief matter of time before the Asian currency war goes thermonuclear. Moving to Europe, it should surprise nobody that the only key data point, Eurozone Industrial Production for January missed badly, printing at -0.4% on expectations of a -0.1% contraction, down from a 0.9% revised print in December as the European recession shows no signs of abating. So while the rest of the world did bad or worse than expected for the third day in a row, it will be up to the POMO and seasonally adjusted retail sales data in the US to offset the ongoing global contraction, and to send the perfectly manipulated Dow Jones to yet another all time high, in direct refutation of logic and every previous market reality ever.

A 2-minute read on developments in the global capital markets. Equity markets are heavy, bonds little changed as is the dollar. Sterling is the big winner on short covering and bottom picking.

• Cardinals head to conclave to elect pope for troubled Church (Reuters)
• Hyperinflation 'Unthinkable' Even With Bold Easing: Abe (Nikkei)
• Ryan Plan Revives '12 Election Issues (WSJ)
• Italy 1-yr debt costs highest since Dec after downgrade (Reuters)
• Republicans to unveil $4.6tn of cuts (FT) - Obama set to dismiss Ryan plan to balance budget within decade
• CIA Ramps Up Role in Iraq (WSJ)
• Hollande Hostility Fuels Charm Offensive to Show He’s No Sarkozy (BBG)
• SEC testing customized punishments (Reuters)
• Judge Cans Soda Ban  (WSJ)
• Hungary Lawmakers Rebuff EU, U.S. (WSJ)
• Even Berlusconi Can’t Slow Bulls Boosting Euro View (BBG) - luckily the consensus is never wrong
• Funding for Lending ‘put on steroids’ (FT)
• Investigators Narrow Focus in Dreamliner Probe (WSJ)
• With new group, Obama team seeks answer to Karl Rove (Reuters)

Just like yesterday, it will be up to the US session to provide the perfectly expected, VIXterminating, volumeless ramp as the rest of the world just did not have it in i to take the S&P to all time highs in overnight trading. To summarize: currency talkfare out of Asia, hope springs eternal out of Europe despite the usual spate of ugly numbers, PIIGS bond auctions backstopped by the ECB and always "that much better" than the expected, a UK economy that is just imploding to provide an alibi for more open-ended QE and a crushed pound, and with the US due to make everything better by sending the SP to its all time high (just 9 points away) on the one week anniversary of the record high DJIA, as the NY Fed clobbers the VIX to a 10 handle or lower on even more ugly, unadjusted economic data.

Just like a week ago, when the futures experienced an unprecedented event when they actually slid overnight (only to recoup all the losses and then some, in the US trading session), so today sentiment appears to be driven by China which over the weekend once more posted its worst economic numbers to start the year since 2009, with purposeful economic weakness telegraphed by the politburo coupled with higher than expected inflation in what is a harbinger to the end of the global reflation, just as it was in 2011. The Shanghai Composite closed down 0.3%, while the Nikkei was in a world of its own, closing up 0.5%, tracking nothing but the USDJPY nowadays. Additionally, while the US stock market took Friday's downgrade of Italy in stride, and in fact Getco's algos used it to catalyze a late day ramp to close the DJIA just around the "psychological" 14,400 (just like Dow 36,000 is apparently psychological), Europe is less sanguine, and so far Italian bonds have been pressured compared to the rest of PIIGS, rising with yields rising to 4.65%, hitting 4.694% earlier. That's ok though: as we reported over the weekend, there is nothing for widening BTP spreads that a few hundred billion in Fed reserve reallocations to European banks can't fix. And with no macro events or news on today's calendar, perhaps the most notable event so far is the lack of the overnight ramp, which we have all grown to love and expect almost as much as the mysterious 3:30 pm intraday clockwork DJIA ramp.

This objective report concisely summarizes important macro events over the past week.  It is not geared to push an agenda.  Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases. 

The US dollar rose to new multi-month highs against several of the major currencies, including the euro, Swiss franc, British pound and the Japanese yen.  The BOJ, BOE and ECB meet last week and none changed policy.  The Swiss National Bank meets on March 14 and is also unlikely to change policy.  The Federal Reserve meets the following week and is widely expected to stay its course.  It is not monetary policy then providing the new trading incentives. 

Nor can the dollar's gains be attributed to political uncertainty in Europe stemming from the inconclusive Italian elections, as was the case previously.   The immediate shock has worn off and Italian stocks and bonds have recovered the lion's share of those initial losses.