Another Overnight Futures Ramp

To think it took a really ugly economic number, such as the Services PMI reported last night, to stir the Chinese stock market out of a hypnotic drift lower, and push it up by 2.7%. Why? Because in the New Normal bad economic news means hope that central banks get involved, and as we have explained the ongoing SHCOMP collapse is purely a function of the PBOC remaining on the sidelines. Last night, rumors (very unfounded and very incorrect) that the central bank would intervene put a stop to the drop. Sadly, as the PBOC has no intention of ending its ultra-short term reverse-repo driven market support strategy, the bounce will be very short lived. However, that coupled with more jawboning out of the BOJ that it would act, if it has to (whether under Abe or Noda), sent the JPY even weaker, and futures ramping on tiny overnight volume which wiped out all the previous day's losses.

The Services PMI reports continued into the European session, with Italy (44.6, exp. 45.9), UK (50.2, Exp. 51.0) and France (45.8, exp. 46 .1) missing, and Spain (42.4, exp.41.0) and Germany (49.7, exp. 48.0) beating, leading to an overall Eurozone Service PMI beat of 46.7 on expectations of a 45.7, and up from the same. However, this indicator was helpless to prevent the ongoing collapse in purchasing power across the continent as the closed loop of recession grips Europe, and where decreased output means decreased consumption, in this case manifesting in a total collapse in Retail Sales which tumbled -3.6% in October from a year earlier, far below expectations of a "modest" drop of -0.8%, and the largest fall since May 2009. Sandy's fault too?

Finally, Spain priced a total of €4.25 billion in 2015, 2019 and 2022 bonds at yields of 3.39%, 4.669% and 5.29% respectively, which was less than the €4.5 billion total sought. The Spanish bond complex widened noticeably since the auction, as Spain continues to desperately prefund its 2013 cash needs taking advantage of a euphoric market, which continues to be desperately confused and lift every SPGB offer, ostensibly without realizing that by handing Spain financing conditions on a silver platter, the country will have no incentive to actually implement the internal rebalancing needed to make it a sustainable long-term economy, and in the process, paradoxcially, assure that all those bonds today, and recently, will very soon blow out once Spain's reality finally trickles down to even the greatest bond-buying fool. Of course, this assumes that in the New Normal reality, and newsflow, will once again dominate over best central-planning intentions. This is a big assumption: we may we float on auto pilot until the big reset finally hits.

As for what the world would look like if it had in fact taken its bitter medicine, lived through a period of sharp, acute and brief pain, and removed the central-banking crutches which do nothing for the economy, and everything to preserve the financial status quo, Danse Bank provides a glimpse, when it predicts that the Iceland economy will grow 2.5% in 2012 - well above the developed world "New Normal" rate of growth.

Elsewhere, even Europe's healthiest countries continue to be dragged down by the insolvent periphery as AAA-club member Finland just posted a -0.1% decline in GDP on expectations of a +0.3% rise. With neighbors like these...

DB's Jim Reid with the less cynical recap:

Chinese equities are leading the rally in Asia overnight despite what has been a relatively soft lead from the US trading session yesterday. Indeed the Shanghai Composite is up 3% as we type, taking the index back above the symbolic 2,000 level. The local media (like Xinhua News) is reporting that Tuesday’s meeting of the Chinese Politburo included a discussion on how to ‘actively promote urbanisation’ which is boosting the performance of Chinese construction and development stocks overnight. A top think-tank, the Chinese Academy of Social Sciences, forecast that the second largest economy may grow by 8.2% in 2013 which probably also lifted sentiment. In reality the Shanghai Composite has been and still is a major underperformer this year with year-to-date gains of around – 7.6% even with this move overnight. In comparison the S&P 500, DAX, and the Hang Seng are all up by +11.9%, +26.1% and 18.3% in what has been generally a positive year for most risky assets.

Elsewhere in overnight markets most Asian bourses are trading with a firmer tone. The KOSPI, ASX 200 and the Nikkei are up +0.5%, +0.37% and +0.17% respectively. In currencies, the USDJPY is up 0.4% overnight on talk from the BoJ’s Nishimura that the central bank will “continue to pursue powerful easing”; while the AUDUSD is holding onto to the 1.047 level following the release of GDP data showing the Australian economy grew by 0.5% QoQ in Q3 (vs 0.6% expected). In other data, China’s HSBC services PMI for November came in at 52.1 (vs 53.5 prior month).

Given a lack of major market catalysts, Obama’s interview on Bloomberg was perhaps the notable development over the past 24 hours. The President said the Republican’s counteroffer “does not go far enough” as he held his ground on raising tax rates for the top 2% of income earners. The S&P500 reached an intraday low of (-0.4%) yesterday as Obama’s interview began, but equities clawed back some of the losses to close 0.17% lower as the President offered the potential for a renegotiation of top tax rates in late 2013 in return for broadening the tax base and closing loopholes.

In Europe, the ECOFIN meeting came and went without much progress on EU bank supervision. The German and French positions remained clear, with Schauble preferring a “lighter” version of banking supervision covering larger institutions to be implemented gradually, while his French counterpart maintained that financial problems “don’t only come from banks regarded as systemic”. Finance ministers will reconvene next Wednesday for the fifth time in as many weeks in the hope of getting agreement before the year-end (Bloomberg). On the subject of banks, our European bank analysts published a note looking at the path of deleveraging since 2008 which has largely occurred via asset growth constraints, business run-offs and retained earnings. They believe that the final year of the deleveraging process will be in 2013 as banks strive to meet Basel III and leverage targets. 2014 is likely to be an inflection point as regulatory pressures ease.

Back to yesterday’s markets, the Stoxx600 closed virtually unchanged (+0.04%) but was down from the intraday highs of +0.4% on thin newsflow and data. European financials (+0.54%) were the outperformers while resources stocks (- 0.39%) were the laggards. Not helping the natural resources sector was the broad weakness in the commodities prices as declines were led by gold (-1.1%), Brent (-0.97%) and Copper (-0.1%).

It was interesting to see the Dollar Index (-0.3%) weaken for the fifth straight session leading into next week’s FOMC where there is certainly some chatter of a possible QE4 being announced.

In the fixed income markets, the EFSF yesterday issued three month bills at a yield of - 0.047%, down from -0.0291% at last month’s sale. Spanish 10yr bond yields paused for breath after rallying in 12 out of the last 16 days to finish the day largely unchanged at 5.251%. In Greece, the FT reported that it’s likely that the task of tendering bonds into the Greek buyback will fall on Greek, Cypriot and EU state banks with a number of hedge funds holding out for the time being.

On a related topic, our European economists note that Cyprus is nearing a deal which could see the country receive a EUR17bn bailout, equivalent to around 100% of GDP which would dwarf the bailouts of the Irish, Portuguese and Greek programmes in size relative to economic output. The programme will likely be approved at a special Eurogroup meeting on December 13th, or a day after the aforementioned EU finance ministers meeting.

Turning to the day ahead, service sector PMIs will the main focus in Europe where we will get first readings for Italy and Spain, and final readings for France, Germany and the Eurozone. Spain will report October IP while the Eurozone’s October retail sales are also scheduled. Spain will also auction 3/7/10yr bonds today. In the US, factory orders, non-manufacturing ISM and the ADP employment report are key data points but the latter will likely to be the main focus ahead of Friday’s payrolls number.


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