Overnight Levitation Returns As The Elephant In The Room Is Ignored

With every modestly positive datapoint being desperately clung to, now that even Goldman's Hatzius has once more thrown in the economic towel after proclaiming an economic renaissance in late 2012 just like he did in late 2010 only to issue a mea culpa a few months later (and just as we predicted - post coming up shortly), the key prerogative is to ignore the elephant in the room. That, of course, is that the JPY 1 quadrillion bond market had to be halted for the second day in a row as the Japanese capital markets are fast becoming a very big and sad joke. The resulting flight to safety from Japanese investors, who sense that their own bond market is on the verge of breaking down completely, has managed to send French and Belgian bonds to record lows, the Spanish 2 Year to sub 2%, the German 6 month bill negative in the primary market, the US 10/30 year constantly bid and so on. The immediate result is that the bond-equity disconnect continues to diverge until one day we may get negative 10 Year rates coupled with an all time high stock market. Gotta love the fake New Normal market, in which the Japanese penny stock market was up another 2.8% to well over 13,000 even as the Shanghai Composite plumbs ever redder territory for 2013 on fears the birdflu contagion will hurt the already struggling economy even more.

As for the good news, there wasn't much. German Industrial Production beat estimates handily even as the general economy and stock market continues to deteriorate, printing at 0.5%, on expectations of +0.3%. This however came at the price of a downward revision in the prior month, which was revised from 0.0% to -0.6%. Alternatively, the EURUSD which dropped to an overnight low of 1.2970 before beginning its overnight levitation coinciding with Europe open, has been doing everything in its power to ignore the fact that Portugal, as BNP summarized it, is rapidly moving toward a second bailout in the aftermath of this Friday's much discussed constitutional court decision, and subsequent announcement that public workers may be paid in Treasury bills instead of cash. The Portugal-German spread has blown out as a result, but so far the damage has been contained and the EURUSD is ramping to overnight highs, oblivious in its certainty that the Portuguese "lack of cash" haircut will not be a template, nor a blueprint, and is a very, very special situation. 

Macro newsflow out of the US will be light this week, however all eyes will be on yet another quarter of weak corporate data, with Alcoa as usual kicking off earnings season after the close. Markets will be sure to ignore weak cash flow data as well, just as they have been great at largely ignoring the rapid deterioration in the macro data in the month as well.

Bloomberg's bulletin notes the other various key overnight highlights:

  • Treasuries steady as JPY falls to 99.01 vs USD, weakest since May 2009; third day of declines after BoJ said last week it would boost monthly bond purchases to $76b.
  • Friday’s weak U.S. non-farm payrolls will put a stop to QE tapering discussion, at least until it becomes clearer on whether the slowdown is just a soft patch,   Goldman’s Jan Hatzius writes in client note
  • Portugal will carry out more spending cuts this year and ruled out further tax increases after the Constitutional Court blocked a plan to suspend a monthly  salary payment to state workers and pensioners
  • Distrust of the Fed and concern that U.S. dollars may become worthless are fueling a push in more than a dozen states to recognize gold and silver coins as legal tender
  • Slovenia’s creditworthiness is deteriorating as investors speculate a banking crisis will force it to follow the  island nation and become the sixth euro country to need aid
  • German industrial production rose 0.5% in Feb., more than 0.3% est.; Jan. revised to -0.6% from previous 0.0%
  • North Korea may detonate a nuclear device and carry out a missile test together as early as this week, South Korea’s government said
  • David Cameron will take his case for a more flexible EU to Spain, France and Germany this week, seeking the alliances he needs to renegotiate Britain’s status  within the 27-member bloc
  • Nikkei gains 2.8%; European markets, U.S. index futures gain. Energy gains, precious metals lower

Deutsche summarizes the other main events

Alcoa’s Q1 earnings this evening marks the start of the US reporting season and provides the latest pulse-check on the momentum of growth after what was a generally disappointing week for US data last week. We’ll get a bit more colour on the US growth picture at the back end of the week with jobless claims (Thurs), retail sales and consumer sentiment survey (Friday). Unless we get a run of stronger data soon the market is going to increasingly wonder whether the latest soft patch in US data is only weather or sequester-related or actually a repeat of the weaker mid-year seasonals we’ve seen over the last three years.

Portugal topped the weekend headlines after the country’s constitutional court rejected a number of austerity measures in the 2013 budget late on Friday. The measures in question included a cut in state pensions and public sector wages, which apparently breach a constitutional requirement that the burden of fiscal policy be fairly distributed and not discriminate between state and private sector workers (Financial Times). Over the weekend, the Portuguese government said that the impact of the decision will be offset by finding additional spending cuts, which the European Commission welcomed overnight as the ‘the best way to restore sustainable economic growth and to improve employment opportunities in Portugal”. The European Commission’s statement added that continued implementation of the country’s programme is a precondition for a decision on the lengthening of the maturities of the financial assistance. Portuguese bonds have underperformed in recent weeks and currently trade at their highest yields of the year at around 6.25%. Indeed, the spread between Portuguese and Spanish 10yr bonds yields reached 156bp on Friday, or more than double the lows in January when the spread was just 70bp.

Turning to Asia and we’ve had some pretty interesting moves to start the week. The Abe-trade continues to pay dividends with the Nikkei up another 2.4% overnight bringing total gains since the BoJ’s announcement last Thursday to 6.2% (+8.4% from the intra-day low prior to the announcement). Meanwhile the yen is 1% lower overnight to trade at around 98.60 as we type, the weakest level against the greenback since 1H 2009. After selling off 9bp on Friday, 10yr JGB yields are back down 2bp to 0.51% overnight. In terms of the news flow, Japan’s current account rebounded to a surplus for February (JPY637bn not
seasonally adjusted vs JPY457bn expected), its first surplus in four months helped by the recent fall in the yen. Domestic newswires are reporting that the BoJ will begin with 1trn worth of JGB purchases next week targeting maturities of between 5 to 10 years (Nikkei).

In China, losses are being seen in Chinese equities (Shanghai Composite -0.7%, Hang Seng -0.1%), led by weakness in transportation, hotel and other tourism related stocks after news that the number of bird flu cases has increased to 21 over the weekend. So far, the reported cases appear to be limited to the city of Shanghai and adjacent cities. Chinese airline stocks were down 5-10% on Friday. Unsurprisingly, healthcare stocks are the only industry sector to trade higher on the Shanghai Composite this morning. Elsewhere on the back of ongoing tension in the Korean peninsula, the Korean won is 0.6% weaker against the dollar, mirroring a similar loss on the KOSPI. Over the weekend, the North Korean authorities said that they cannot guarantee the diplomatic missions in Pyongyang from April 10th onwards. With the late Kim Il-Sung’s birthday (North Korea’s founder and grandfather of the current leader) coming up on April 15th we can probably expect more rhetoric from the North Koreans over the coming week.

Briefly returning to Friday’s session and the aftermath of the US payrolls report. We’re sure that you’ve seen the numbers by now, but to put it into context the +88k headline print for March was the worst outturn since June 2012, and the fourth worst since the beginning of 2011. Against expectations of 190k, the miss of 102k was the largest since December 2009, where in the midst of the Global Financial Crisis, the US economy shed 220k jobs against expectations of zero change. In other details of the report, labour force participation fell to 63.3%, the lowest level since 1979. Perhaps the only silver lining was the significant upward revisions (+61k) to the prior two months of data.

In terms of the market reaction, S&P500 futures sold off 11 points on the back of the data, but the S&P500 (-0.4%) itself managed to close only marginally lower after clawing back most of the opening losses throughout the day. Friday marked the 12th consecutive alternating up/down day for the S&P500.

European equities were already trading in the red at that point, with the payrolls number helping the DAX, CAC and IBEX close near the day’s lows of - 2.0%, -1.7% and -0.6% respectively.

In that context, credit markets outperformed on Friday with the European iTraxx, Crossover and the IG20 all managing to finish the day around 1-3bp tighter. Global government bond yields continued to trade lower on Friday, led by the 10yr UST yield which sank to an intra-day low of 1.67% before finishing at 1.71%, the lowest level since mid-December. Indeed, across the globe the more aggressive than expected easing by the BoJ and disappointing US data are adding headwinds to the view of stronger growth and higher core rates.

Indeed, the renewed bid for duration saw 30yr UST yields hit a year-to-date low of 2.87% while France’s 10-yr yield fell to 1.72%, the lowest ever. 10yr bund yields reached the lowest since July 2012. In other weekend developments, the UK managed to avoid a downgrade from S&P of its AAA rating for the time being but the rating agency kept its outlook on negative after warning of the risks to growth and hence government debt. S&P said its views the government as remaining committed to implementing its fiscal program and that it has the ability and willingness to rapidly respond to economic challenges. The news came after equity markets had shut in London, although it did help sterling close 0.2% higher against the euro on Friday.

Looking more closely at this week’s docket, Wednesday’s March FOMC minutes will be closely scrutinised in light of the debate over the timing of QE tapering – DB’s Joe LaVorgna warns that the minutes may be slightly dated following the disappointing week of data just passed. With that in mind, the week’s list of Fed speakers may provide a better real-time gauge of the FOMC’s current thinking. The list of speakers includes Bernanke who will be delivering the keynote address at an Atlanta Fed conference today, and who will also speak again on Friday. At least nine other FOMC members will be speaking on various days this week.

Elsewhere, we have a number of other important growth/macro data points this week. China provides it latest update on inflation tomorrow followed by trade numbers on Wednesday. Key data releases include in Europe include industrial production numbers from the Euroarea and the UK in the first half of the week and German/UK/French trade reports on Tuesday. In Europe, the two day Eurogroup/ECOFIN meeting starts on Friday - on the agenda is a review of the Portuguese and Irish programs. JPMorgan and Wells Fargo round out the first week of earnings season on Friday.


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