Quiet Trading Day As The US Takes A Break

With the US closed today, the Shanghai Composite red after a week of partying not helped by news from China’s Ministry of Commerce showed that spending during the week-long Lunar New Year break grew at the slowest pace since 2009, and the Nikkei merely a tick-for-tick proxy of whatever the USDJPY does which in turn is a mood indicator for how any given G-7/20 statement is interpreted, the only relevant news in today's thinly traded market would come from Europe, where the EUR is once again modestly higher in overnight trading, even as Spain and Italy bonds are selling off.

Among the key European developments was the news that Spain's bad loans posted their first monthly drop in years as banks dumped their non-performing exposure to the state-funded bad bank. From WSJ: "The Bank of Spain said Monday that bad debts held by the country's banks dropped sharply in December from November because of the transfer of lower-quality credit portfolios to the so-called bad bank that started operations that month.  Nonperforming loans fell by €24.1 billion ($32.20 billion) to €167.4 billion, or 10.4% of total outstanding loans, in December, preliminary data from the central bank showed. That compares with a bad-loan ratio of 11.4% in November, the highest ever recorded. At the same time, total loans shrank to €1.604 trillion from €1.683 trillion, largely the result of loan reclassifications after the lower-quality loans were passed on to SAREB, as the bad bank is known, the Spanish central bank said in a statement." Said otherwise, it is not as if the tens of billions in Spanish NPLs suddenly resumed paying again - it is just that, as everything else, they too were swept under the sovereign rug. Which for Spain is becoming quite problematic: as El Pais reported yesterday, official Spanish debt (not counting the hundreds of billions in off balance sheet obligations), rose to €882 billion in 2012, a surge of €146 billion in one year, sending interest expense to an all time high €38.7 billion.

With no major macro news, traders focused on the usual litany of central banker statements. First up was Bundesbank board member Andreas Dombret who said the European Central Bank must begin to withdraw its emergency policy measures as soon as an exit is justified, and warned that leaving interest rates low for too long can fuel asset-price bubbles. “Monetary policy cannot lose sight of the exit from extraordinary measures and must act when an exit is warranted,” Dombret said in a speech in Hamburg today. Banks shouldn’t rely on low interest rates and policy makers should remember the risks inherent in cheap credit, he said.

Ah yes, the legendary central bank "exit" - we for one can't wait.

Sure enough moments later the ECB fired back when its governing council member Nowotny said that market fear of euro breakdown ‘is no longer relevant.’ What he didn't say is that the fear is as relevant as always, and will come back front and center as soon as the ECB's reality distorting verbal arsenal is finally tested by the market once the realization that European countries have done nothing from a structural standpoint in the period of time the ECB bought them since last July.

Nowotny also said that he sees euro-area economy troughing in 1Q, that the euro area remains weak point of world economy, but more importantly that the ECB sees ‘no immediate need’ for currency intervention, and that just like the BOJ it can pervert the truth as the best of them saying the ECB has no exchange-rate target, only inflation target and that ECB forecasts still hold for now. Finally he added that central banks intervene only if price stability risk. Curiously he also commented on the SNB saying Swiss deflation would have been worse if no SNB action and that it is ‘Too early’ for SNB to think about 1.30 target. Finally he added that SNB more likely to raise target to 1.30 than lower. It remains to be seen how happy the SNB is that the ECB now comments on its own policy measures. 

Lastly, confirming that the schism between "Europe" and Germany is as wide as ever, was Nowotny's conclusion that Ireland’s promissory note swap is sensible, while concurrently the Bundesbank said that Ireland’s Anglo deal, and specifically the "involvement of the Irish central bank in the nation’s effort to ease the burden of its financial restructuring", is problematic.

Some indicative market levels this morning:

  • Spanish 10Y yield up 6bps to 5.26%
  • Italian 10Y yield up 5bps to 4.44%
  • U.K. 10Y yield down 1bp to 2.18%
  • German 10Y yield down 3bp to 1.62%
  • Bund future up 0.33% to 142.81
  • BTP future down 0.52% to 111.82
  • EUR/USD down 0.09% to $1.3348
  • Dollar Index up 0.07% to 80.64
  • Sterling spot down 0.31% to $1.5473
  • 1Y euro cross currency basis swap little changed at -19bps
  • Stoxx 600 down 0.36% to 286.3

And a complete recap of recent news, including the latest chaos and gibberish from the G-20, comes courtesy of Deutsche Bank:

After a lively week for currencies, ending with the G20’s fairly tame communiqué on avoiding “exchange rate misalignments”, USDJPY is again making strong gains overnight as markets take the G20’s somewhat benign statement as a green light for further yen depreciation. The yen has extended its losses against the dollar in overnight trading, trading 0.4% weaker against the USD and adding to Friday’s 0.67% depreciation. Fresh headlines in Tokyo overnight have helped take the USDJPY briefly above the 94.00 level while the Nikkei is trading 2.1% higher. Speaking in parliament in Tokyo overnight, the Japanese PM said that buying foreign bonds is a monetary policy option and the law governing the BoJ could be revised if it fails to get results. Abe also added that it is the norm for governments to dictate a price target to the country’s central bank.

Returning to the communiqué itself, the G20 pledged to “move more rapidly toward more market-determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals”. Seeking to downplay the notion of currency wars, the G20 added that “We will refrain from competitive devaluation. We will not target our exchange rates for competitive purposes”. On fiscal consolidation, the G20 said that “credible medium-term fiscal consolidation plans will be put in place and implemented, taking into account near-term economic conditions and fiscal space where available”. Speaking after the release of the communiqué, Japanese finance minister Taro Aso defended his government’s economic policies, saying that “Abe’s administration is doing its utmost to escape from deflation and we have gained a certain understanding [at the G20]”. The JPY has been one of the most watched macro themes this year and will probably continue to be so for some time yet.

Elsewhere in Asia, onshore Chinese markets have reopened after a one-week hiatus with the Shanghai Composite trading with a small loss overnight (-0.1%). Outside of China, other regional equities are trading broadly higher including the ASX200 (+0.6%) which has joined other global indices in reaching a new cyclical high, supported by recent gains in banking stocks. Indeed within the Asian time zone, the ASX 200, the Hang Seng, and the Shanghai Composite have all risen by about 17%, 11% and 24% since their Q4 2012 lows, respectively. In terms of other news highlights overnight, retail sales data from China’s Ministry of Commerce showed that spending during the week-long Lunar New Year break grew at their slowest pace since 2009. New Year sales at shops and restaurants monitored by the Ministry of Commerce increased 14.7% compared with 16.2% in 2012 and the least since a 13.8% gain in 2009.

Speaking of retail sales, a Bloomberg report which suggested that Wal-Mart had its worst start to February sales in seven years prompted a late afternoon sell-off in US equities back on Friday. The article quoted a Wal-Mart executive describing the company’s February sales as a “total disaster” apparently affected by higher payroll taxes this year. Whether or not this turns out to be a wider trend is yet to be determined, but US retail stocks (-0.72%) were the clear underperformer relative to the broader S&P 500 (-0.10%) on Friday. Wal-Mart’s stock was off 3.8% at one point, but recovered some ground to close 2.15% weaker on the day. Wal-Mart later issued a statement saying that “we often see internal communications that are not entirely accurate, that lack the proper context and represent individual opinions”.

Overall the S&P500 managed to close higher for the seventh consecutive week, its longest winning streak in two years.It was a fairly mixed day for data though. US industrial production for January disappointed (-0.1% vs +0.2% expected) weighed by the largest decline in auto production since August 2012. On a more positive note, the February New York Empire (10.0 vs. -2.0 expected) and UofMichigan consumer confidence surveys (76.3 vs 74.8 expected) surprised to the upside. The Empire Manufacturing index moved back into positive territory for the first time in six months and reached its highest level since May 2012.

In terms of Fedspeak, Cleveland Fed President Sandra Pianalto (a non voter) made some comments suggesting that the Fed could taper down asset purchases, echoing  somewhat similar comments from St Louis Fed’s James Bullard earlier last week. The comments helped 10yr UST yields close just above 2.00% on Friday (+4bp) while gold lost 1.5% to close at its lowest level in about six months ($1610/oz).

Previewing the week ahead, the FOMC, BoJ, BoE and RBA all release meeting minutes this week. Before this it will be a relatively quiet start to the week in the US with President’s Day today. As far as the US dataflow is concerned, housing data will be the main focus with Tuesday’s NAHB housing index, Wednesday’s housing permits/starts and Thursday’s existing home sales. Housing aside, Thursday jobless claims and CPI and Friday’s flash PMI will be worth watching. Japanese PM Abe will be visiting the White House for talks on Friday.

In Europe, the highlight of this week’s calendar is Thursday’s flash manufacturing and service sector PMIs for the Euro area, France and Germany. Ahead of that the German ZEW survey (Tuesday) and Eurozone consumer confidence (Wednesday) are the other major data releases. 65 Stoxx600 companies accounting for 8% of the index market cap will be reporting including Carlsberg, Allianz, AXA, Swiss Re, Credit Agricole and Deutsche Boerse. Draghi’s speech at the quarterly hearing on the ECB at the European Parliament will probably be the main event for today. Spain’s latest bond auction (Thursday) and the European Commission’s economic growth forecasts (due on Friday) will round out what should still be a fairly eventful week for markets.