Europe's double dipping economy may be continuing to implode, but at least confidence abounds. And while the conifidence game was the purvey of career politicians and ex-Goldman central bankers in January, it has now shifted to Europe's equivalent of the reflexive UMichigan consumer confidence, after Germany's ZEW investor confidence soared to 48.2 vs expectations of a modest 35.0 print, leaving January's 31.5 print in the dust, and the highest since April 2010. And all of the surge was based on the hope, with none attributed to reality, or current conditions. From SocGen: "The positive mood in both the equity and bond markets since the beginning of the year has led to a strong surge in expectations (economic sentiment) in the ZEW survey, a survey completed among German investors. This surge was entirely driven by expectations while current activity remains muted. Expectations in most surveys have recently been rising more strongly than expected, but at one point we expect some moderation. We consider that Germany and the euro area are in a situation of readjusting expectations and activity from the weakness at end-2012. The recovery in expectations may already have overshoot if hard data disappoint in the coming weeks."
And while Europe is starry-eyed with hope about the future, as it is in the beginning of every year, it blithely ignored the fact that new car registrations collapsed in January by 14.2% to a new record low, while construction output in the Euroarea declined for a second month in December, tumbling by 4.8% led by slumping activity in, wait for it, Germany. But this time the future will be different.
Curiously, the massive surge in the ZEW did nothing to spark risk on in Europe, where the EURUSD first spiked higher, then ended lower as the news of the jump was digested, and as the understanding that only disappointment lies in the future spread. Furthermore, as SocGen adds, when asking if this is enough to get algos to buy: "we will probably have to wait until the second LTRO's reimbursement (Friday) and for the outcome of the Italian elections (Sunday/Monday) for investors to look at economic indicators again, and then re-embark on pro-risk strategies. US investors will be preparing for the FOMC minutes published tomorrow. We note that the December meeting minutes (published in January) were surprisingly more hawkish than the FOMC press release. Will the same be true of the January minutes?"
But while Europe's imminent bruising disappointment at hopium not matching reality can be seen from miles, pardon, kilometers away, more troubling news came from Mario Monti, who said earlier that he has nothing in common with the Bersani Bloc. Readers may recall that unless Bersani joins in coalition, he would not have the required 158 Senate seats (and even in that case it would be a nailbtier) to avoid another round of early elections and political gridlock and a virtual halt to "reforms." More from Bloomberg citing Messaggero:
- "Nobody will force us to govern, but those who will want to work with us will find the doors open:’’ Monti in Messaggero
- Possible to cut taxes progressively; property tax on first homes can be reduced without jeopardizing public finances: Monti in Messaggero
- Says if elected his govt would cut size of parliament and ease “fiscal burden on workers and companies:” Monti in Messaggero
- Italy doesn’t need new austerity measures: Monti in Messaggero
As a result of all the above, Europe's markets now stand as follows:
- Spanish 10Y yield down 2bps to 5.21%
- Italian 10Y yield down 2bps to 4.39%
- U.K. 10Y yield down 0bps to 2.2%
- German 10Y yield down 1bp to 1.62%
- Bund future up 0.03% to 142.8
- BTP future up 0.19% to 112.27
- EUR/USD down 0.02% to $1.3348
- Dollar Index down 0.04% to 80.6
- Sterling spot up 0.17% to $1.5491
- 1Y euro cross currency basis swap little changed at -20bps
- Stoxx 600 up 0.58% to 288.42
And whatever happens, don't look at China, where the Shanghai Composite has posted its second steep daily loss after the start of the Year of the Snake.
More from Deutsche Bank:
With US markets closed for President’s Day and no major economic releases in the last 24 hours, the focus has remained squarely on the yen which has had yet another volatile overnight session. Indeed the yen was trading 0.4% higher against the dollar in early Asian trading after a number of comments from Japan’s finance minister Taro Aso. Aso told a news conference that there are no intentions of buying foreign bonds, a day after Prime Minister Abe said such a policy could be an option for future easing. Aso also told reporters that for the time being the government has no plan to revise the BoJ law, also seemingly at odds with Abe’s suggestions to parliament on Monday. The yen has managed to retrace some of its gains though, after the release of minutes from the BoJ’s January meeting where the central bank described the economy as remaining “relatively weak”. Several board members also proposed the extension of the maturity of JGB purchases to around 5 years. As we type the yen is 0.3% stronger against theUSD (93.65) in Asian trading.
Balancing out some of the more dovish statements in the BoJ minutes, outgoing BoJ governor Shirawaka stated that “it was increasingly important to ensure that the public did not perceive such purchases of government securities as having been conducted for the purpose of monetisation”. Speaking of public perception, the Asahi Shimbun has published a poll suggesting that Abe’s Cabinet has increased its popularity since its recent inauguration to 62%, the first administration to increase its popularity since coming to power “in years”.
Amongst respondents, 53% approved of Abe’s policy of setting an inflation target of 2%. Meanwhile, Japan's Chief Cabinet Secretary Yoshihide Suga said on Tuesday that the government will likely propose its candidates for the three top jobs at the Bank of Japan next week when PM Abe returns from his visit to the White House (Nikkei).
In Europe, equities edged lower (Stoxx600 down 0.2%) and bunds were better bid as political worries in Italy simmered yesterday with major political parties beginning their last week of campaigning ahead of next week’s elections. Italian and Spanish equities underperformed, as did their bonds - Italian 10yr bond yields added 2bp to close at 4.404% while Spanish 10yrs added 4bp to close at 5.232%. With recent moves, Italian 10yr yields are now more than 25bp off the January lows, though still around 220bps lower than the peaks seen in the summer of 2012.
The talk on the valuation of the euro continued yesterday with Draghi telling lawmakers at the European parliament that the ECB will monitor the euro through its impact on price stability, a reiteration of his previous stance on the topic. The ECB’s Nowotny sought to downplay talk of the euro saying that the "exchange rate is moving in a range we have had before. We have had no special developments. There is a euro appreciation against the yen but not to a dramatic extent”.
Returning to Draghi’s speech, which covered a wide-range of topics, the ECB President described Ireland’s IBRC promissory note exchange as a “positive” step for Ireland but added that the deal will be reviewed by the ECB in its annual assessment later this year. Draghi reiterated that he expected a gradual growth recovery in the euro zone later this year. On the topic of bank deleveraging, Draghi commented that “proper deleveraging” is crucial, but that the foremost policy challenge was to increase the flow of credit.
Questioned on whether Europe could adopt a BoE-inspired Funding for Lending scheme, Draghi warned against imposing lending conditionality on banks, saying that it could force lending to the “wrong borrowers”.
Turning briefly to Asian markets, regional equities are mostly trading lower overnight with Chinese and Japanese equities leading the losses. The Shanghai Composite and Hang Seng are down 1.25% and 0.3% respectively as property stocks and cyclicals weigh on both bourses after a report in Chinese media that the government may introduce new policies to curb homes prices within the next month (China Business News). The Nikkei is down 0.25% overnight, with yen strength weighing on Japanese equities. Asian credit markets are trading with a firmer tone overnight.
Looking at the day’s calendar, we should have a fairly quiet day ahead of us with the only economic data of note being the German ZEW survey (markets are expecting an improvement on January) and the NAHB housing market index in the US. The EU’s Ollie Rehn speaks this morning in Brussels on the topic of the future of the euro while Italian PM candidate Bersani is campaigning today in the election battleground region of Lombardy.