It has been a busy overnight session starting off with stronger than expected food and energy inflation in Japan even though the trend is now one of decline while non-food, non-energy and certainly wage inflation is nowhere to be found (leading to a nearly 3% drop in the Nikkei225), another SHIBOR spike in China (leading to a 1.5% drop in the SHCOMP) coupled with the announcement of a new prime lending rate (a form a Chinese LIBOR equivalent which one knows will have a happy ending), even more weaker than expected corporate earnings out of Europe (leading to red markets across Europe), together with a German IFO Business Confidence miss and drop for the first time in 6 months, as well as the latest M3 and loan creation data out of the ECB which showed that Europe remains stuck in a lending vacuum in which banks refuse to give out loans, a UK GDP print which came in line with expectations of 0.8%, where however news that Goldman tentacle Mark Carney is finally starting to flex and is preparing to unleash a loan roll out collateralized by "assets" worse than Gree Feta and oilve oil. Of course, none of the above matters: only thing that drives markets is if AMZN burned enough cash in the quarter to send its stock up by another 10%, and, naturally, if today's Durable Goods data will be horrible enough to guarantee not only a delay of the taper through mid-2014, but potentially lend credence to the SocGen idea that the Yellen-Fed may even announce an increase in QE as recently as next week.
Market Re-Cap by RanSquawk
Markets got off to a cautious start this morning, as market participants reacted to less than impressive EU based earnings and also continued to fret over yet another up tick in money market rates in China. Financials and telecommunications sectors underperformed, with credit spreads widening and the Euribor curve steepening after the 3m Euribor rate fixed above Thursday’s level. The FTSE-100 index in the UK outperformed its peers, supported by the release of an encouraging advanced GDP report and also the fact that BoE’s Carney announced late Thursday that the central bank will offer banks money for longer periods and accept a wider range of collateral. Looking elsewhere, even though the release of the latest German IFO number failed to meet consensus estimate, market reaction was relatively muted. Going forward, market participants will get to digest the release of the latest durables goods report, as well as earnings from Procter & Gamble and UPS.
Overnight news bulletin from BBG and Ran
- China’s money-market rate completed the biggest weekly jump since a cash squeeze in June after the central bank refrained from injecting funds through open-market operations
- The PBOC wants to avoid the problems seen in June where money market rates soared, increasing concerns of defaults and may resume reverse repos if money market rates are too high, according to PBOC sources.
- UK GDP (Q3 A) Q/Q 0.8% vs. Exp. 0.8% (Prev. 0.7%) - strongest growth since Q2 2010.
- German business confidence fell for the first time in six months in October, with the Ifo institute’s business climate index declining to 107.4 from 107.7 in Sept and a median estimate of 108 in a Bloomberg News survey
- Treasuries head for weekly gain, spurred by weaker-than-forecast September payrolls which pushed expectations for Fed taper until at least March FOMC meeting.
- U.K. GDP rose 0.8% in 3Q, in line with forecasts and the biggest increase since 2010; BOE presents new quarterly forecasts on Nov. 13 amid growing expectations officials will concede interest rates may have to increase earlier than forecast in August
- RBNZ Gov. Wheeler said NZD is “very strong,” would be prepared to intervene if opportunity arises to “make a difference and create uncertainty”
- Credit Suisse and Citigroup are among banks grappling with a round of probes into MBS sales, as the U.S. uses a 1989 law to extend scrutiny of Wall Street’s role in the credit crisis and seek additional penalties from the industry
- European leaders condemned the reported U.S. hacking of Merkel’s mobile phone and said they will seek trans-Atlantic accords on espionage practices
- Sovereign yields mixed, EU peripheral spreads tighten. Shanghai Composite fell for a fourth day, leading Asian equities lower; European stocks and U.S. equity-index futures decline. WTI crude higher; gold and copper fall
The PBOC wants to avoid the problems seen in June where money market rates soared, increasing concerns of defaults and may resume reverse repos if money market rates are too high, according to PBOC sources.
The PBOC launched a new loan prime rate benchmark lending rate system for commercial bank lending, with the aim of liberalizing interest rate reform. The PBOC also added it is to further promote interest rate liberalization.
Japanese National CPI (Sep) Y/Y 1.1% vs. Exp. 0.9% (Prev. 0.9%), Tokyo CPI (Oct) Y/Y 0.6% vs. Exp. 0.5% (Prev. 0.5%)
- National CPI Ex Food and Energy (Sep) Y/Y 0.0% vs. Exp. 0.0% (Prev. -0.1%) - first non-deflationary reading since Dec'08.
EU & UK Headlines
German IFO Business Climate (Oct) M/M 107.4 vs. Exp. 108.0 (Prev. 107.7)
German IFO Current Assessment (Oct) M/M 111.3 vs. Exp. 111.4 (Prev. 111.4)
German IFO Expectations (Oct) M/M 103.6 vs. Exp. 104.5 (Prev. 104.2)
Eurozone M3 Money Supply (Sep) Y/Y 2.1% vs. Exp. 2.4% (Prev. 2.3%)
UK GDP (Q3 A) Q/Q 0.8% vs. Exp. 0.8% (Prev. 0.7%) - strongest growth since Q2 2010.
UK GDP (Q3 A) Y/Y 1.5% vs. Exp. 1.5% (Prev. 1.3%) - highest since Q1 2011 .
Barclays month-end extension: Euro Agg +0.08y
Barclays month-end extension: Sterling Agg +0.02y
According to sources, top banking regulators in the US are recommending lenders strengthen underwriting standards for leveraged corp. loans as borrowing of the high-risk debt approaches levels not seen since before the fin. crisis.
Barclays month-end extension: Treasury +0.06y
Markets got off to a cautious start this morning, as market participants reacted to less than impressive EU based earnings and also continued to fret over yet another up tick in money market rates in China.
Financials and telecommunications sectors underperformed, with credit spreads widening and the Euribor curve steepening after the 3m Euribor rate fixed above Thursday’s level.
UK banks outperformed its peers this morning, as market participants welcomed decision by the BoE to offer money for longer periods, accept a wider range of collateral, including “any asset of which we are capable of assessing the risks” and lower the cost of using the bank’s facilities.
Despite the cautious sentiment as evidenced in lower trading stocks, EUR/CHF edged higher and topped the psychologically important 200DMA line to the upside. Separately, USD/JPY also managed to recover off overnight lows but remains below the 200DMA line.
East Libya has declared itself as an autonomous authority to the central government, in what is seen as a direct challenge to the federal Libyan government.
A senior White Official has said that the US are not looking to ease sanctions 'at the front end' following reports that Iran are set to reduce their nuclear programme.
Indian finance minister Chidambaram asked regulators to take all possible measures to prepare for the tapering of quantitative easing policies of the US Fed.
In related news, there were also reports that India is to approach sovereign wealth funds for debt investments to offset any likely impact of US Fed tapering, according to a government official.
UBS says physical gold premiums in India may continue to rise.
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We round of the round up with the commentary by Deutsche Bank's Jim Reid
Markets are off to a cautious start to Friday’s trading though. Every major Asia regional index is trading lower with the exception of the ASX200 (+0.25%) while S&P 500 futures are down 0.2%. Japanese equities are faring poorly (- 2.2%) despite a better (ie higher) than expected inflation reading (1.1% YoY vs 0.9% expected). Core CPI measures were flat YoY and -0.2% MoM suggesting weakening upward momentum of prices. The yen’s strength against the dollar is also weighing on sentiment there. Chinese equities (-1.1%) are again lagging the broader region and are on track for their fourth consecutive loss which is the longest losing streak in nearly three months. Negative earnings reports from a number of Chinese corporate are weighing on A-shares while banking shares are rebounding (+0.6%) following sharp losses yesterday. The seven-day repo rate continues to climb (+40bp to 4.80%), though it should be noted that rates have tended to climb into the month-end over the past few months. Our Chinese bank equities team believes that rising inflation pressure and net capital inflows in September 2013 have prompted banks to preserve more liquidity, in anticipation of a potentially tighter monetary stance by the PBOC.
As a result, money market rates have spiked up, but they believe rates should normalize unless October’s CPI data surprises on the upside. Staying in China, there is some market chatter that the government is considering wide-ranging financial market and economic reforms ahead of the Country’s third plenum meeting in November - which will be attended by the President, Premier, ministers and heads of the largest state-owned enterprises.
While the market continues to push back on Fed tapering, a Bloomberg report overnight suggested that the Fed has sent letters to some of the largest US banks asking them to avoid originating loans that can be considered as “criticised”. The description relates to any loans that can be classified as having some deficiency that may result in a loss. According the article, 42% of leveraged loans were placed in that category this year. This comes after $839bn of leveraged loans were originated this year in the US, which is within 7% of the record $899bn set in 2007 (Bloomberg). This follows comments from Fed Governor Jeremy Stein who commented earlier this year that some segments of the credit markets are showing signs of excessive risk taking. So it’s fair to say that there is growing interest in this issue within the Fed.
Staying on the topic of central banks, the BoE Governor Mark Carney struck a decidedly softer tone towards the banking sector yesterday in his first major policy speech on financial sector regulation. The tone could be described as conciliatory, at least compared with that of his predecessor Mervyn King who was criticised as taking a harder line stance during the financial crisis. Indeed, it’s clear to us that a Mark Carney BoE would be more aggressive in supporting the banking system in the future if the need arose than his predecessor. Amongst the ideas floated by Carney yesterday, one involved amending the Index Long Term Repo to allow banks to tap central bank liquidity with lower grade collateral, and to do so at a lower charge. Carney commented that "The range of assets we will accept in exchange will be wider, extending to raw loans and, in fact, any asset of which we are capable of assessing the risks”. The Bank will also make the terms of its discount window more generous. Mervyn King's worry of moral hazard seems to have been kicked out the door of the BoE.
Yesterday’s US data flow was mixed and did little to directly add to the tapering debate. Initial jobless claims for the week of October 19 declined -12k to 350k after the prior week was revised up +4k to 362k. The Department of Labor indicated that the backlog of initial claims in California continued to distort the data. The preliminary Markit PMI disappointed at 51.1 (vs 52.5 expected and 52.8 previous) which followed a similarly disappointing round of Euroarea PMIs (51.5 vs 52.4 expected and 52.2 previous). The JOLTS job openings survey showed 1.7% of workers quit their jobs in August, which though low by historical standards, is at multi-year highs. The US trade balance for August was broadly unchanged MoM at -$39bn. 10yr UST yields traded as low as 2.47% at one point yesterday following the data, but promptly backed up to finish just above 2.50%.
Looking at the day ahead, much of the focus in the European timezone will be on the German October IFO report and Eurozone credit aggregates. The UK’s preliminary Q3 GDP print is due today where consensus is looking for +0.8% qoq. In the US, data releases include capital goods orders, the final UofMichigan confidence survey and wholesale inventories.