China Down Fifth Day In A Row Means US Is Alone In Yet Another Forced Market Ramp Attempt

This is the third day in a row that an attempt to mount an overnight ramp out of the US has fizzled, with first the Nikkei closing down for the second day in a row and snapping a week-long rally, and then the Shanghai Composite following suit with its 5th consecutive drop in a row (perhaps it was drinking piggy water?) as the rumblings out of the PBOC on the inflation front get louder and louder, following PBOC governor Zhou's statement that inflation expectations must be stabilized and that great importance must be attached to inflation. Stirring the pot further was SAFE chief Yi Gang who joined the Chinese chorus warning against a currency war, by saying the G20 should avoid competitive currency devaluations. Obviously China is on the edge, and only the US stock market is completely oblivious that the marginal economy may soon force itself to enter outright contraction to offset the G-7 exported hot money keeping China's real estate beyond bubbly. Finally, SocGen released a note last night title "A strong case for easing Korean monetary policy" which confirms that it is only a brief matter of time before the Asian currency war goes thermonuclear.

Moving to Europe, it should surprise nobody that the only key data point, Eurozone Industrial Production for January missed badly, printing at -0.4% on expectations of a -0.1% contraction, down from a 0.9% revised print in December as the European recession shows no signs of abating.

Shortly thereafter, Italy followed up with a disappointing bond auction, selling just €6.99 billion in 2015/17/18/28 bonds, below a maximum target of €7.25, and where the bid-to-cover of the 2.75% 2015 bond auction was 1.28, the lowest since January 2012 as demand continues to drift. Yields rose across the board, with the 2015 BTP pricing at 2.48% compared to 2.30% previously, the 2017 CCTeu at 2.95%, vs 2.55%, the 2018 CCTeu at 3.03% and the 2028 yielding 4.90%. The broadly weak auction sent Italian yields to overnight wides as the market was very much unimpressed with the first debt take up following the Italian elections.

The Italian auction was in broad contrast to the German 2015 Schatz issuance, which priced at 0.06%, down from 0.21%, at a 1.7 BTC, and 14% retention. Not all news out of Germany was good, however, following confirmation from Commerzbank of yesterday's news that it would proceed with a €2.5 billion capital raising plan to repay funds, sending the stock more than 10% lower on the day. Looks like the Great Un-Rotation from the periphery to the core, and from stocks to bonds is once again starting to pick up.

So while the rest of the world did bad or worse than expected for the third day in a row, it will be up to the POMO and seasonally adjusted retail sales data in the US to offset the ongoing global contraction, and to send the perfectly manipulated Dow Jones to yet another all time high, in direct refutation of logic and every previous market reality ever.

Such is life under central planning.

News headline bulletin from the overnight session via Bloomberg:

  • Treasuries steady, with 10Y yields declining for a second day. Yen gains vs U.S. dollar, EUR/USD falls.
  • Chinese stocks fell, dragging the Shanghai Composite to a two-month low, as real estate and construction companies tumbled on concern policy makers will step up property curbs
  • Borrowing costs rose at Italy’s sale of 2.75% 2015 notes, with an average yield of 2.48% vs. 2.30% at a Feb. auction; bid-to-cover was lowest in over a year
  • Homeowners with underwater mortgages in U.S. states worst-hit by foreclosures are leading refinancings after the government expanded programs to aid borrowers, strengthening the weakest link in the housing recovery
  • Haruhiko Kuroda will appear before parliament again even if he’s confirmed this week as Bank of Japan governor as a technicality in the nomination process  means lawmakers will vote twice on his candidacy
  • The Swedish krona’s appreciation hasn’t left the currency strong enough to threaten the central bank’s inflation target, Deputy Governor Barbro Wickman-Parak said
  • Treasury sells $21b reopening of 2% Jan. 2023%; yield 2.02% in WI trading. 3Y notes sold yesterday drew 0.411% with mixed bidder participation metrics
  • BofAML Corporate Master Index OAS holds at 145bps as $10.4b priced yesterday. Markit IG at 80bps, near YTD low 79bps. High Yield Master II OAS steady at  476bps; $1.05b priced yesterday. CDX High Yield closed at 104.19, near highest since Feb. 2011
  • EUR/USD trades at 1.3019. Nikkei falls 0.6%, other Asian stock markets fall. European equity markets and U.S. index futures decline. Global sovereign yields  mostly lower, while Italy/Germany spread widens. Energy gains, precious metals lower

Quick view of where the markets stand:

  • S&P 500 futures down 0.07% to 1545.7
  • Stoxx 600 down 0.2% to 294.77
  • US 10Yr yield at 2.01%
  • German 10Yr yield at 1.48%
  • MSCI Asia Pacific down 0.55% to 135.42
  • Gold spot down 0.1% to $1591.21/oz
  • MSCI Asia Pacific down 0.55% to 135.42
  • Nikkei 225 down 0.61%, Hang Seng down 1.46%, Kospi up 0.32%, Shanghai Composite down 0.99%, ASX down 0.5%, Sensex down 0.91%

DB's Jim Reid summarizes the full overnight action:

We always say that the week after payrolls should be fairly quiet as there is usually a lack of tier one data. Often something then comes along to focus the market's mind and liven things up. Well not this week so far. It’s been pretty dull to date. Maybe today's US retail sales or the first post election sitting of the Italian parliament this Friday might provide some interest.

One of the main talking points yesterday was a disappointing UK industrial production print. Industrial and Manufacturing Production in the UK fell -1.2% and -1.5%, respectively in January. This fell short of broadly flat expectation. On the back of that, our own Dr. Buckley took a look at the outlook for Q1 GDP (initial reading is due on the 25th April) and he is of the view that the output contraction in Q412 and a high margin of error around his Q113 forecast have raised the prospect of a “triple-dip” in the UK (ie. 2008-09, 2011-12 and 2012-13). It seems the UK is at risk of making our shorter business cycle theory look too optimistic!

Watch out for today’s Euroland Industrial Production number with markets expecting a -0.1% mom and a -2.0% yoy decline.

Sterling reacted badly to the IP release and gapped from around 1.491 to a 33-month low of 1.483 against the Dollar before recovering most of this ground to finish the day unchanged at 1.490. Interestingly for the UK, the 10-year bond breakevens also edged higher to 3.347%, a level not seen since September 2008. So there is some risk that inflation expectations are being un-anchored. We've said many times that the UK is a fascinating market to watch as it is ahead of the cycle in many areas in this post Great Recession world. It seems us poor citizens are lab rats!!

Elsewhere, the lack of any major market catalysts basically saw European equities trade sideways/lower throughout most of yesterday. The DAX, FTSEMIB and IBEX finished -0.23%, -0.42% and -0.26%, respectively. Equally soft was also the Stoxx600 Bank Index (-0.42%) which wasn’t helped by news that  Commerzbank plans to raise fresh equity to increase its capital by as much as 10%. Away from equity markets, Financials were a major underperformer in European credit with the iTraxx Financial Senior index out by +5bp versus a +2bp move in iTraxx Main. In peripheral sovereigns, Spanish bonds extended further gains with the 10-year yield down nearly 4bps to 4.726% at yesterday’s close – all in all wrapping up a 64bp decline over the last 10 days.

In the US, the S&P 500 (-0.24%) snapped a 7-day rally that drove the index to within 9 points of its all time high, mainly led lower by Financials (-0.63%), IT (-0.57%) and Industrials (-0.54%). The softer tone in equities added some support to Treasuries as the 10-year yield edged 4bps lower to 2.016%.  Interestingly in commodities we saw the national average gasoline prices rise on Monday for the first time in 13 days. We highlighted this as one of the  interesting indicators to watch in yesterday’s EMR given the ‘tax’ effects of higher energy prices on disposable incomes and the intense focus on the US recovery. As a rule of thumb, a one cent change in gasoline prices reduces annual non-energy consumption by roughly $1billion.

The softer market tone is extending into the Asian session overnight with bourses across Japan, Hong Kong and China down -0.5%, -0.3% and -0.3%, respectively. The JPY has been firmer over the last 24 hours as political opposition emerged towards the nomination of Iwata as the Bank of Japan’s deputy governor. Chinese equities are down for the 5th straight day led by declines in industrial and financial companies.

In other news, the Bundesbank’s Jens Weidmann was on the tape yesterday saying that the Eurozone sovereign crisis is not over and still represents the most significant risk for the German economy - despite recent improvements in financial markets. He added that there was uncertainty about the reform course in Italy and Cyprus and added that the reform course in France seems to have ‘floundered’.

Turning to the latest fiscal debate in the US, House Budget Committee Paul Ryan yesterday released a budget plan which aims to balance the budget in ten years. The plan also includes a partial privatisation of medicare and a repeal of Obama’s health-care law. Specifically his proposal aims to reduce spending from 22.8% of GDP in 2012 to 19.1% of GDP in 2023. The deal was quickly criticised by the President and in the meantime Democrat Senate Budget Committee Chairman Patty Murray is working on a competing plan (to be released today) that would raise taxes by nearly $1 trillion over the next 10 years and spend  nearly $100 billion on a new jobs package – both of which are ideas that have been firmly rejected by Republicans (Washington Post). President Obama plans to release his own budget plan in April. It doesn't seem that the sides are getting much closer but it hardly seems to trouble markets at the moment.

In terms of today, US retail sales will likely be the main data point to watch. The market is expecting a +0.5% headline print up from +0.1% in the previous month. That aside, we have business inventories and the monthly budget statement for the month of February. We also have a $21bn 10-year UST auction. In Europe we also get non-farm payrolls from France and IP numbers already discussed. We're also promised warmer weather here in London today! This is good news as a trip to get lunch over the last couple of days has been like mounting a polar expedition. Riding a bike to work has been brutal. Things I’ll do to be able to get into my wedding outfit later this year!