Sentiment Muted With Japan, China Closed; Event-Heavy Week Ahead

With China and Japan markets closed overnight, activity has been just above zero especially in the critical USDJPY carry, so it was up to Europe to provide this morning's opening salvo. Which naturally meant to ignore the traditionally ugly European economic news such as the April Eurozone Economic Confidence which tumbled from a revised 90.1 to 88.6, missing expectations of 89.3, coupled with a miss in the Business Climate Indicator (-0.93, vs Exp. -0.91), Industrial Confidence (-13.8, Exp. -13.5), and Services Confidence (-11.1, Exp. -7.1), or that the Euroarea household savings rates dropped to a record low 12.2%, as Europeans and Americans race who can be completely savings free first, and focus on what has already been largely priced in such as the new pseudo-technocrat coalition government led by Letta. The result of the latter was a €6 billion 5 and 10 year bond auction in Italy, pricing at 2.84% and 3.94% respectively, both coming in the lowest since October 2010. More frightening is that the Italian 10 year is now just 60 bps away from its all time lows as the ongoing central bank liquidity tsunami lifts all yielding pieces of paper, and the global carry trade goes more ballistic than ever.

What is most curious, as the FT points out in "Italy will lead eurozone revolt against austerity" is that now that so-called austerity is dead in Europe (having been stillborn and much better known by its other name, Fauxterity), and the peripheral countries are set to return to their "drunken-sailor" spending ways that got them in trouble in the first place, the market can't applaud loud enough. Of course, when all global debt is now backstopped by the money printing bad banks formerly known as central banks, what is there not to like. After all Bernanke and his merry academic men are surely in control of the world with an iron fist, and there is no risk of anything bad happening ever again.

Finally, Friday's takedown of gold has so far proven to be quite ineffective and whoever decided to pound the yellow metal precisely as Europe closed on Friday will have to redo it all over again, seemingly providing a much better entry point to everyone who bought at the lows following the now laughable smackdown whose only purpose is to take out the entire bidstack in what can only be classified as not rational "best execution" selling, but banging some close or another, an activity that once upon a time used to be illegal.

Bloomberg's bulletin summary of the notable highlights:

  • Fed unlikely to change asset purchases, will likely put off tapering for now, analysts and strategists say
  • ECB may lower refinancing rate this week; any such move largely discounted, investors will be looking for additional credit-easing measures, analysts and economists say
  • Euro area economic confidence decreased more than forecast in April as the 17- nation currency bloc struggles to emerge from a recession and the bailout of Cyprus renewed debt-crisis concerns
  • Minutes from the latest Swedish central bank meeting revealed a growing preoccupation with the krona as the strengthening currency pushes down inflation
  • GBP rose to strongest in 10 weeks vs USD after an industry report showed U.K. house prices increased this month, boosting optimism the economy is gathering pace
  • Enrico Letta’s government is poised to be installed starting today, as the end of two months of political turmoil in Italy was marred by the shooting of two policemen outside the prime minister’s office in Rome
  • Italy’s 10Y borrowing costs declined to a 2 1/2-year low at an auction today, drawing 3.94% vs 4.66% at a March sale of that maturity
  • Europe may accelerate a shift away from its austerity- first agenda this week as the new Italian government changes course and a German-Spanish investment pact underscores a renewed focus on combating record unemployment
  • Greek lawmakers passed a bill including plans to fire 15,000 workers by the end of next year as the government of Prime Minister Antonis Samaras cleared the latest hurdle to receiving international aid payments
  • JPMorgan was the top payer among investment banks last year, awarding its senior employees a fifth more than Goldman, according to a report that also highlights a growing divide between firms based in the U.S. and Europe
  • China’s securities regulator plans to raise the minimum proportion equity funds should have in shares, a move that  may drive investments into the worst- performing major Asian stock market in the past year
  • Global sovereign yields mostly lower, led by Australia and Italy. EU sovereign spreads to Germany tighten
  • Japan, China closed for holiday. European equity markets mostly higher, U.S. index futures gain. WTI Crude, gold, copper gain

A quick recap of macro events from SocGen:

A decline in the VIX index, higher stocks and a bounceback in the JPY have been the exception rather than the norm in not too distant history, but this is precisely how currency and risk assets closed last week and are squaring up to this week's fireworks featuring the FOMC, ECB and US non-farm payrolls. With so much event risk concentrated into 48 hours, today and tomorrow should see a fairly slow and lethargic start to proceedings with May Day public holidays across Europe set to drain liquidity from currencies and bonds.

The EUR has enjoyed a decent month so far and is only trailing GBP and NZD as third-best performer in the G10, not bad considering the worsening economic outlook and speculation that the ECB could cut rates on Thursday. Our call on the ECB is for no change in rates, but we are not ruling out an expansion of the non-standard policy tools to help improve lending to the real economy. M3 data on Friday showed a further slowdown to 2.6% yoy in March with lending to non-financial corporations in particularly bad shape. It is not just the EUR but also eurozone equities that are doing well. In local currency terms, the Eurostoxx 50 is up 2.44% this month compared to a 1% gain for the S&P and 0.1% for the FTSE. This does pale of course in contrast to the 12% surge in the Nikkei, but then the ECB is not inflating its balance sheet the way the BoJ is. Let's see whether the ECB thinks economic conditions have worsened enough to warrant fresh action. EC confidence indicators are set to reaffirm a bleak picture in early Q2 and inflation in Germany is set to have slowed to 1.4%. This means that real rates in Germany have tightened by over 50bp since the start of the year. With foreign demand slowing, president Draghi will not be inclined to tolerate a stronger EUR. That means EUR/USD remains a sell on rallies. However, as US data proved last week, it may be down to the ECB to force a breakthrough below 1.2950. How long it stays there could be contingent on the message from the FOMC and payrolls. US 10y yields are plumbing 2013 lows and disappointment over non-farm payrolls would put the debate over Fed tapering on ice.

The full summary from the Jim Reid team at DB:

Turning to markets, Asian equities are mixed overnight despite a negative US lead on Friday as Q4 GDP in the US (more below) came in weaker-than-expected. Japanese and Chinese markets are closed overnight. The Hang Seng is flat but the ASX 200 is +0.5% and the KOSPI is down -0.4% as we type. A reported slowdown in Chinese industrial profits is perhaps also not helping sentiment. Chinese industrial corporate profits are up 12.1% YTD in March, down from a stronger 17.2% print in February. Asian credit markets are firm with IG CDS spreads a touch tighter in overnight trading. New issues remain the dominant theme for EM Asia. Spot Gold is up at $1470/oz after a +0.5% rally overnight.

Recapping Q1 US GDP from Friday, the advanced reading came at +2.5% annualised. This compares with market estimates of 3.0%. Government and net exports were a drag to the headline, which shaved 50bps and 80bps from growth, respectively. Household spending offered some relief although business investments remain cautious. Our US economists think that given the softer-than-expected print on Q1 GDP and broad-based views among economists that the economy will downshift in Q2, two sets of data, namely employment and various production surveys such as regional PMIs and national ISMs, will take on particular significance in the near term.

At a micro level company results remain relatively average to disappointing with top line misses firming up as a key trend for Q1 for US corporates. We’ve now seen just over half of the S&P 500 firms reported. While EPS trend remains solid with nearly ¾ of those beating expectations, only 45% of those have topped analysts’ sales revenue estimates. If this wasn’t enough the initial signs from European reporting is even worse with EPS and sales revenue beat:miss ratio running at 44%:56% and 34%:63%, respectively.

Earnings seem to be outweighed by liquidity and more confidence in the European story at the moment. Indeed a new government in Italy was formed on Sunday which ended the political stalemate of the past two months. Enrico Letta was sworn in on Sunday as the new PM after having managed to form a broad PD-PDL coalition with Berlusconi. In the latest, Berlusconi told the media yesterday that Letta had agreed to his demand to use the first Cabinet meeting to eliminate a property tax on first homes and to reimburse last year’s payment.

Away from Italy, there seems to be increasing hints of austerity relaxation in Europe. Rajoy’s government last Friday approved a plan to delay Spain’s deficit reduction target to within the EU limit of 3% of GDP to 2016 instead of 2014. The plan was also endorsed by the European Commission. Elsewhere, Schaeuble said he will use a meeting with Spanish Economy Minister Guindos later today to push for a bilateral investment program that sidesteps the EU Commission.

Staying in Europe, Cyprus has started the conversion of cash deposits into bank equity as a prerequisite for external aid. The Bank of Cyprus on Sunday said it had converted 37.5% of deposits exceeding EUR100k into "class A" shares, with an additional 22.5% held as a buffer for possible conversion in the future. Another 30% would be temporarily frozen and held as deposits (Reuters).

Despite it being a blockbuster week for data and central bank meetings it is also a shortened week for various key markets globally given 1st May Labour Day and variations thereof. Markets in Hong Kong, Singapore, Germany, Spain, and Italy will be closed on Wednesday. For those in China, it is a three day holiday which only sees the Shanghai Stock Exchange returning on Thursday. Japan is closed overnight and also on Friday for bank holidays.

Besides the key events of the week mentioned at the start, we also have the Chicago PMI (Tuesday), ADP Employment and ISM manufacturing (Wednesday), Trade balance (Thursday) and ISM services (Friday) this week in the US. In Europe we will get some Euroland confidence numbers today followed by inflation and German unemployment tomorrow. The European Commission’s will also release its latest economic forecast for the EU on Thursday. In Asia all eyes will be on the official Chinese PMI on Wednesday followed by the final HSBC variant on Thursday. Company earnings wise we have 137 S&P 500 companies and 84 Stoxx600 companies in Europe (including some of the major financial institutions) reporting this week.


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