Same Yen-Funded Melt Up, Different Day


The same pattern we have seen every day for the past week is back - slow overnight levitation as bad news piles on more bad news. What bad news? First as noted earlier, a collapse in Chinese imports and a surge in exports, which as SocGen explained is a harbinger of economic weakness in the months to follow, leading to yet another negative close for the Shanghai Composite. Then we got the UK January construction data which plunged by 7.9% according to ONS data. Then the Bank of Italy disclosed that small business lending was down 2.8% in January. We also got a negative Austrian Q4 GDP print.  We also got Spanish industrial output plunging 5% in January (but "much better" than the downward revised -7.1% collapse in December). Capping the morning session was German Industrial Production which not unexpectedly missed expectations of a 0.4% increase, printing at 0.0%, although somewhat better than the horrifying Factory Orders print would have implied. Finally, the ECB announced that a total of EUR4.2 billion in LTRO 1+2 will be repaid in the coming week by 8 and 27 counterparties, about half of the expected, and throwing a monkey wrench in Draghi's narrative that banks are repaying LTRO because they feel much stronger.

Yet none of this matters for two reasons: i) the Japanese Yen is back in its role as a carry funding currency, and was last trading at 95.77, the highest in four years, and with Jen shorts now used to fund USD purchases, the levitation in the stock futures was directly in line with the overnight rout in the Yen; and ii) the buying spree in Spanish bonds, with the 10 Year sliding overnight to just 4.82%, the lowest since 2010.

Bottom line - facts and reality haven't mattered in a long time, and still don't, since the only relevant factor is ongoing liquidity injections, giving the impression things are better (Spanish bonds), or used to fund risk asset purchases (USDJPY).

The latest risk on ramp may be detoured today with the NFP report, but we doubt it.

Summary of key European market metrics:

  • Spanish 10Y yield down 6bps to 4.832%, lowest since Nov. 2010
  • Italian 10Y yield down 2bps to 4.57%
  • U.K. 10Y yield down 1bp to 2%
  • German 10Y yield steady at 1.5%
  • Bund future down 0.03% to 142.79
  • BTP future up 0.26% to 109.49
  • Euro down 0.06% to $1.3099
  • Dollar Index up 0.15% to 82.21
  • Sterling spot up 0.13% to $1.5033
  • 1Yr euro cross currency basis swap up 2bps to -19bps
  • Stoxx 600 up 0.46% to 294.54

And the full overnight recap from DB's Jim Reid:

Right. Its that time of the month again where we all huddle round a Bloomberg terminal to receive the latest US employment report. One never gets bored of this random number generator event and as a member of the analyst union such events give us an excuse to have gainful employment. Heading into today’s release, the Dow (+0.23%) closed at a record high for the third consecutive day, the S&P500 (+0.18%) is now within 1.5% of its October 2007 record, the CDX IG index is trading at series tights and 10yr UST yields have backed up towards to the top of their recent trading range – all this while expectations for February payrolls have been steadily revised upwards following encouraging employment indicators in recent days.

As it currently stands, the February payrolls report is expected to deliver a modestly better headline number than the one in January. The Bloomberg consensus is for a gain of 165k in the headline (vs 157k prior) and a gain of 170k in private payrolls (vs 166k prior). The unemployment rate is expected to remain unchanged at 7.9% though. DB is expecting a 180k gain in the headline and 7.7% unemployment.

Before all this, overnight the FED released its latest banking stress test results which concluded that 17 out of 18 US bank holding companies will have a projected tier 1 common ratio above the minimum 5% under a “severely adverse scenario” (the exception was Ally Financial Inc). The severely adverse scenario included a real GDP decline of 5% by the end of 2013, unemployment at 12%, CPI decelerating to 1%, equity prices down by 50% and real estate prices down by 20%. Attention will now turn to the Fed’s Comprehensive Capital Analysis and Review, due next Thursday, which will evaluate the banks’ ability to make capital distributions such as dividend payments and stock repurchases.

Also making headlines overnight, China’s trade report for February showed that exports were up 21.8%yoy (vs 8.1% expected). At the same time, imports were down 15.2%yoy (vs -8.5% expected) – resulting in a surplus of $15.2bn (vs - $6.9bn expected). The Lunar New Year has complicated the interpretation of data given that the national holiday fell in February this year and January in 2012. In light of the trade data, China’s commerce minister said that the country will seek to stabilise exports and expand imports in a bid to seek balance trade development. Despite an initial dip, most Asian equities are trading firmer led by gains in the Hang Seng (+1.8%) and KOSPI  (+0.1%). The AUD is trading weaker against the greenback (-0.25%) following the weaker than expected Chinese
import number.

Elsewhere in Asia, the Nikkei us up 2.6% and is poised for its seventh consecutive daily gain, and the yen is 0.6% weaker against the USD. Japan’s trade report showed seasonally adjusted 8.9% export growth out-pacing a 7.0% rise in imports, narrowing the trade deficit to ¥657.1bn. In addition, Q4 GDP data showed that the Japanese economy grew by 0.2%ann (vs-0.4% expected) which is also buoying sentiment.

Moving back to yesterday's session, what do we make of the ECB meeting yesterday and Draghi's comments?

Reading separate assessments from DB's Alan Ruskin and Mark Wall/Gilles Moec there is a general feeling that the ECB is in policy limbo at the moment with Alan Ruskin suggesting that they are riding in the Fed's slipstream at the moment rather having a proactive set of tools at their disposal. Although they downgraded growth expectations they still expect a recovery this year. For this they're probably relying on the Fed and others in the Global economy to help them and also on there not being political problems in Italy. The problems will arise if any of these factors change as a consensus plan B within the ECB doesn't seem to be there at the moment. For now healthy global (especially US) sentiment is helping the ECB but it remains a delicate situation.

In the UK, the BoE decided to leave rates and the size of its asset purchase programunchanged. The former was broadly expected whereas the latter was more contentious in the lead up to yesterday’s decision given that three of the nine-strong MPC Committee - including the Governor himself - voted for additional asset purchases in the last meeting. We'll see how close things were in the minutes in a couple of weeks.

Before we preview the day ahead, we want to highlight a new HY strategy document from my team with the first one being published yesterday. Each piece will contain a topical issue alongside month-end analysis looking at the performance of the European HY market, subsectors and best/worst performing Bonds. We will also cover new issuance volume/performance and highlight key High Yield Analyst changes that may have occurred over the month up to the date of publication. The aim is to make this a new monthly strategy document but we'll confirm this after feedback from readers. So please feel free to offer up any comments on whether such a document is useful and what changes/additions would be helpful. The first note focuses on the relative performance of leverage loans vs HY. In terms of the general market view, in our 2013 Outlook we did think that HY performance in the year would be positive, mostly driven by carry. However we did think volatility could be high. Our expectations for a negative February (on Italian election worries) and a rebound in March have so far proved correct. However we probably expected a bit more risk-off in February than we got which limits the scale of the likely positive performance over the next couple of months.

Beyond this, data and liquidity are likely to be key. We still worry European data will disappoint as we approach mid-year. This first may cause a back up in spreads before it again unleashes another round of liquidity. Stephen ( is driving the document so email him if you didn't get it. All good feedback to me and all bad to Stephen please. :-)

Turning to the rest of the day ahead, in Europe industrial production numbers for Germany and Spain are scheduled this morning. Over the weekend, China will publish its latest monthly economic indicators including CPI, fixed asset investment, industrial production and retail sales. Before that though, non-farm payrolls (due at 1:30pm London time) will take centre stage as the main risk event for the day.


No comments yet! Be the first to add yours.