Overnight Sentiment: Dull Levitation Returns

A listless overnight session with just the previously noted first disappointing LTRO-2 repayment and the now traditional big beat out of the "other" German confidence indicator, IFO, which beat expectations of 104.9, rising to a 10 month high of 107.4 to attempt to push the economy out of the recessionary slump (just don't mention yesterday's PMI), and nothing on today's US calendar is a fitting way to end the week, and further shows that markets are once more completely oblivious to the risks of the Hung Parliament outcome that this weekend may bring in Italy should the Berlusconi juggernaut maintain its momentum. The EURUSD and the US futures have disconnected once more, with almost all of yesterday's market weakness filled in the overnight session as the good old low-volume levitation returns. Here are the few news items worth reporting.

From BBG:

  • Treasuries decline, curves little changed as yen declines vs. dollar; EUR/USD fell overnight, touching lowest since Jan. 10 as European Commission says euro- area’s economy will shrink for a second year in 2013.
  • Euro zone’s GDP will contract 0.3% this year vs. prediction in November for 0.1% growth, EC forecast today, with unemployment rising to 12.2%, up from previous 11.8% est., 11.4% last year
  • ECB said banks will return EU61.1b of its second LTRO next week, half the amount forecast by economists
  • With Italian elections due Feb. 24-25, voters may push the nation away from Mario Monti’s austerity policies; Italy election risks not priced in, analysts say
  • Bernanke minimized concerns that the Fed’s easy monetary policy has spawned economically-risky asset bubbles in comments at a meeting with dealers and investors this month, according to three people with knowledge of the discussions
  • China’s new home prices rose in most cities the government tracks for a third month, adding pressure on leaders to intensify policy-tightening efforts to prevent asset bubbles and inflation as the economy rebounds
  • China stocks fell, with Shanghai composite headed for steepest weekly loss in 20 months
  • Overseas investors cut Japanese bond holdings for a fourth week on bets Prime Minister Shinzo Abe will succeed in ending deflation and weakening the yen
  • Nikkei rises 0.7%; European stocks rise, U.S. equity-index futures lower. Italian and Spanish bonds gain. Energy, precious metals higher

Market recap:

  • Spanish 10Y yield down 3bps to 5.17%
    Italian 10Y yield down 4bps to 4.45%
  • U.K. 10Y yield up 4bps to 2.14%
  • German 10Y yield up 2bps to 1.59%
  • Bund future down 0.04% to 143.32
  • BTP future up 0.14% to 111.7
  • EUR/USD up 0.14% to $1.3208
  • Dollar Index down 0.18% to 81.31
  • Sterling spot up 0.11% to $1.5271
  • 1Y euro cross currency basis swap little changed at -20bps
  • Stoxx 600 up 0.62% to 286.64

DB's summary of the past day:

The last 36 hours has certainly told us that the market is still extremely sensitive to any concerns about the withdrawal of liquidity and also to growth. The Fed worried some with a hint of the possibility of slowing QE at some vague point in the future and the flash European PMI numbers were simply pretty bad. It’s impossible to extrapolate from one PMI release but our view has been that the European economy has until around Q2 to prove it can get the momentum that consensus economists expect. If we don't get this then risk is due for a sharp correction until the OMT is eventually activated. So yesterday's numbers are a worry and the next round of European data is going to be even more scrutinised.

Before all that we have the small matter of the Italian elections to contend with. Voting runs from 7am Sunday to 2pm Monday (GMT), with early exit polls coming out soon after. DB’s Marco Stringa will be holding a call at 4pm (GMT) to help make sense of these numbers with the actual result expected late on Monday  night. We'll post the dial-in details on Monday. The key numbers to look out for will be how the parties stack up towards the 158 seats needed for a majority in the Senate. Since the last polls were published on February 8th there are some unconfirmed reports (The Economist) that suggest the centre-right's momentum seems to have tailed off somewhat, with reports that the populist Five Star Movement has apparently been gaining ground. DB’s view on the post-election government continues to be a PD-led centre-left coalition with Monti’s centre; however recent trends have increased the risk of a hung parliament and all the uncertainty that will bring. It looks set to be a fascinating start to next week!

Taking a closer look at the flash PMIs, the euro area composite PMI fell 1.3pts to 47.3 (vs an improvement to 49.0 expected). In France, although manufacturing improved (up 0.6pts to 42.9) services fell to the lowest level since February 2009 (down 0.9pts to 42.7) against expectations for a 0.9pt improvement in both indices. On a more positive note, German manufacturing PMI moved back into expansionary territory (50.1 vs 49.8 previous) for the first time since February 2012, as new export orders rebounded strongly on the back of Asian demand. In addition, the services PMI is still well in expansion mode despite the monthly fall (54.1 vs 55.7 previous). Our economists write that the flash numbers suggest that on average the PMI in the 'non-core' countries weakened on the month in both manufacturing and services by a greater extent than in the core countries.

Returning to Thursday’s US session, the S&P500 continued its decline (-0.63%) after posting its biggest one day fall since November on Wednesday. Indeed the move across the last two sessions has managed to pretty much erase February’s gains, but its performance is still better than other major indices including the Stoxx600, Shanghai Composite, Hang Seng, DAX and CAC40 all of which are trading at levels lower than where they started the month. US data flow didn’t help matters yesterday with jobless claims (362k vs 355k expected), the Markit flash PMI (55.2 vs 55.5 expected), and Philly Fed (-12.5 vs 1.0 expected) all printing weaker than expected. Existing home sales for the month of January increased +0.4% to 4,920k (vs -0.8% expected). Interestingly, the inventory of existing homes for sale fell to the lowest level since 1999.

The weakness in commodities extended for another day as concerns about a macro tightening in China weighed on the CRB commodities index (-1.17%) with crude (-1.79%) and copper (-1.53%) leading losses.

Despite all the concerns about the “tapering’ of Fed purchases, 10yr USTs finished the day back below the 2% mark (1.977%). The VIX (+3.68%) continued its upward March, as did the Dollar index which closed at near six-month highs.

Turning to Asia, the Hang Seng (-0.47%) continues to underperform on fears of Chinese policy tightening. Government data overnight showed that new home prices rose an average of 0.8% in January from a year earlier (+0.7%mom), breaking 10 straight months of declines. The same survey showed that home prices rose in 53 out of 70 cities in January. DB’s Jun Ma writes that he is not overly concerned about the probability of any aggressive macro policy tightening in the near future, but stricter implementation of anti-property speculation policies in a number of cities seems possible. The Shanghai Composite is steady (+0.05%) following yesterday 3% drop. Elsewhere equities are broadly higher with gains seen on the Nikkei (+0.3%) and ASX200 (+0.7%). The yen is trading slightly weaker against the USD (- 0.15%) on relatively thin news flows.

Looking at the day’s calendar, in Europe the dataflow includes the German IFO survey and final Q4 GDP, Italian retail sales and consumer confidence. The European Commission publishes its latest economic growth forecasts. In the US, with no major data releases scheduled, the focus will be on President Obama and Japanese PM Abe who will be holding talks on security and trade at the White House. The two leaders will discuss Japan’s potential entry into the Transpacific Partnership, which is being negotiated between the US and other Pacific nations with the aim of bring down trade barriers. So a fair bit going on, but all eyes will be on Italy as we head into this weekend's elections.


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