Overnight Ramp Driven By Higher EURUSD On Plethora Of Negative European News

A peculiar trading session, in which the usual overnight futures levitation has not been led by the BOJ-inspired USDJPY rise (even as the Nikkei225 rose another 0.6% more than offset by the Shanghai Composite drop of 0.86%), which actually has slid all session briefly dipping under 99 moments ago, but by the EURUSD, which saw a bout of buying around 5 am Eastern, just after news hit that the UK would avoid a triple dip recession with Q1 GDP rising 0.3% versus expectations of a 0.1% rise, up from a -0.3% in Q4 (more in Goldman note below). Since the news that the BOE will likely delay engaging in more QE (just in time for the arrival of Carney) is hardly EUR positive we look at the other news hitting around that time, such as Finland saying that the euro can survive in Cyprus exits the Eurozone, and that Merkel has rejected standardized bank guarantees for the foreseeable future, and we are left scratching our heads what is the reason for the brief burst in the Euro.

Said scratching only gets stronger once we learned that Italy's left-wing Vendola, a former Bersani ally, and president of Apulia, said his party would not support a Letta coalition government, even as Berlusconi himself - the key support of a new government - said parliament backing for a new coalition is not granted, and that it is not important who leads the government but programs that are key, a development which is hardly stability positive.

The scratching gets even stronger once we consider that Spain just announced Q1 unemployment which rose to an even record-er high of 27.2%, up from 26.02%, and "beating" estimates of a 26.5% increase. This too does not strike us as very euro positive.

Finally, the scratching concludes in frustration, following the rise of Spanish and Italian 10 Year yields wider by 10 bps, which most certainly can not explain the move higher in the EURUSD, whose only purpose, we are left to conclude, is to ramp US futures as high as possible on today's disconnect from reality, and that today the DE Shaw ES-trading algos will be following EURUSD signals, while the USDJPY will be off.

Finally, gold is back, baby, and was trading just why of $1450 at last check, $125 higher than the recent "shock and awe" plunge lows.

Various other highlights, in bulletin format courtesy of Bloomberg:

  • Japan investors are net sellers of overseas debt a sixth straight week through April 19, MOF data shows today, the longest streak since Jan. 2010.
  • Central banks, guardians of the world’s $11t in forex reserves, are buying stocks in record amounts as falling bond yields push even risk-averse investors toward equities
  • Spanish unemployment rose to 27.2%, more than forecast, the highest in at least 37 years
  • Silvio Berlusconi, the three-time prime minister and two-time convicted lawbreaker, won a path back to power in Italy by outmaneuvering rivals during an eight-week political stalemate
  • The yuan climbed to a 19-year high as the central bank set a record reference rate amid growing usage of the currency for worldwide trade and investment
  • BofAML Corporate Master Index OAS holds at 147bps; $16.55b priced yesterday. Markit IG narrows to 80bps from 81bps, YTD low 78bps. High Yield Master II OAS narrows to 466 from 471bps; $600m priced yesterday. CDX High Yield rises to 104.89 from 104.73
  • Global sovereign yields mostly higher, led by U.K. and Italy; EU sovereign spreads to Germany widen
  • Nikkei +0.6%; other Asian stock markets mixed, with Shanghai down 0.9%. European equity markets decline U.S. index futures gain. Energy futures, gold, copper gain

For those curious, here is Goldman's take on the UK's last minute "triple-dip" evasion.

Bottom line: According to the ONS's preliminary estimate, UK GDP rose 0.3% qoq (+0.6% yoy, +1.2% qoq annl.), stronger than consensus expectation of a lower rise (Cons:+0.1% qoq, GS:+0.2% qoq). This was primarily driven by strong services sector output, which rose 0.6% qoq and contributed +0.47ppt to qoq growth.


1. The Q1 GDP reading of +0.3% qoq was 0.2ppt above the consensus estimate of a +0.1% qoq rise, and 0.1ppt above our forecast of +0.2% qoq growth. The estimates of economists surveyed by Bloomberg ranged from -0.3% qoq to +0.3% qoq, which reflects the significant uncertainty over the preliminary estimate of GDP. The ONS noted that the preliminary estimate is based on around 44% of the total information that will compromise the final output based GDP data. Consistent with this, the average absolute revision to the preliminary GDP estimate in the ten years to 2010 was +/-0.43ppts.


2. The sectoral breakdown shows a +0.6% qoq rise in services output, which contributed +0.47ppt to qoq growth (Table 1). This was offset slightly by a 2.5% qoq fall in construction output, which reduced headline growth by 0.17ppts. Production rose 0.2% qoq, contributing +0.03ppt to growth. Within this figure, mining and quarrying rose 3.2% qoq, as the maintenance which reduced oil and gas output in Q4 was reversed. Agricultural output fell 3.7% qoq, contributing -0.02ppt to qoq growth.


3. The ONS noted that the snowfall and cold weather during Q1 appears to have had a limited impact on growth. While retail sales in January and March seem to have been negatively affected, this was offset by higher demand for electricity and gas during February and March.


4. As part of the preliminary estimate, the ONS estimates industrial production and service sector output for March using early survey responses. The ONS estimates that industrial production rose 0.3% qoq in March, while service sector output edged up 0.1% qoq.


5. There were minimal revisions to previous quarters. The most notable was an upward revision of Q4 2011 from -0.3% qoq to -0.1% qoq. In time we expect further upward revisions to GDP growth such that the 'double dip' seen between Q4 2011 and Q2 2012 is revised away (Q1 2012 GDP growth is currently estimated at -0.07% qoq).

DB's Jim Reid recaps the balance of news:

We've been discussing how the artificially low default world (a theme of last week's annual default study) looks set to be re-inforced by Japanese QE. Global fixed income has just got a new and large marginal buyer and one which may actually force other regions to either commence QE (Europe at some point in the medium-term future?) or continue with it for longer. Indeed we think that if and when the FED do stop QE it may actually lead to a sharper appreciation of the Dollar which may not be welcome and thus might increase the chance of QE returning again in the US. So we feel that Japan has likely extended the life of Global QE (via a slow currency war) rather than accelerated its demise. For credit this means the technicals are likely to remain strong and defaults stay lower for longer. On the negative side this continues to interfere with the creative destruction forces that tend to be good for longer-term growth and instead locks in a sub-optimum allocation of resources in many developed economies. So lower defaults but lower trend growth. Its not a survival of the fittest world.

Right back to markets it was more of the same for European equities (DAX +1.32%, IBEX +1.21%) as hopes of an ECB easing continue to build along with further data weakness. Yesterday’s disappointing German IFO surveys, which dovetails the PMI weakness the day before, added further support to this theme. Recent negative readings for Germany are difficult to ignore and our European economists are now calling for a 25bps rate cut by the ECB next week (2nd May).

The Q1 Euro area Bank Lending Survey noted modestly improved lending standards (although demand for credit remains low), which led our European economists to think that a rate cut might be more appropriate than a new unconventional policy at this point.

The data flow on the other side of the Atlantic was also far from being spectacular. Durable goods orders in March were disappointing, with the headline reading falling more than expected (-5.7% v -3.0%). Ex-transports and the core reading also came below market consensus. The effects of sequestration is starting to be felt with new orders for defence goods down 29.3% in March, leaving the nominal defence spending amount at its lowest level since January 2006. For markets the price action in equities was uninspiring. The S&P 500 closed the day virtually where it started (at 1579) although we note that Gold is catching a bid after the woeful sell-off last week. The precious metal is now up 9% from the recent intraday lows of $1322/oz. Gold coin sales by the US Mint are reportedly at a 3- year high as the recent price moves have sparked an interest in physical holdings.

At the micro level, 48 S&P 500 companies reported yesterday with 36 of them beating EPS expectations. Top line performance remains sluggish at best with only half of those beating estimates. So the broad theme of top line underperformance in the US remains. European numbers were much worse yesterday as revenue and EPS beat:miss ratios were very weak at 36%:64% and 46%:54%, respectively.

Overnight we are seeing Asian equity markets generally in the green across the region, except for China. The Nikkei, KOSPI and the Hang Seng are up +0.3%, +0.5% and +0.6% as we type. Korea’s GDP came in better-than expected which is perhaps adding some support. The Shanghai Composite (-0.4%) is led lower by banks and developers. Taiwan yesterday confirmed its first H7N9 Avian flu infection. In credit markets, Korea sovereign CDS has recovered from its recent widening and is now back to flat against China’s sovereign at 73bp for the 5-year.

The UST 10-year is holding steady overnight at 1.706%. In fact yields have barely budged this week despite a 1.5% rally in the S&P 500.

Back to Europe, the center-left politician Enrico Letta was nominated by the President to be Italy’s next prime minister. Letta said he would start talks to form a broad-based coalition on today and it is likely to go to parliament for a vote of confidence by early next week. Reuters noted that the PM designate is expected to select a group of ministers, likely to be a mixture of politicians and technocrats. The new government will be backed primarily by Letta's center-left and the centerright PDL party led by Berlusconi.

Away from Italy, Fitch yesterday downgraded Bank of England’s credit rating to AA+/Stable from AAA. This follows on from its downgrade of the sovereign rating last week.

Indeed today’s Q1 UK GDP will be a notable release in Europe. Bloomberg poll is suggesting a +0.1%/+0.4% qoq/yoy rise versus -0.3%/+0.2% in the previous quarter. Spanish unemployment number for Q1 is also due today and the market is expecting a further nudge up to 26.50% from 26.02% in Q4 last year. In the US, initial jobless claims will be the key print to watch. Reporting wise we have 59 S&P 500 and 29 Stoxx600 companies lined up today.


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