Yen Carry Trade Fumbles Again But Equities Supported By Strong European GDP Data

So far the overnight session has been a replica of yesterday, with the all important carry trade once again fizzling overnight during Japan trading hours, and dipping as low at 101.60 before staging a modest rebound to the 101.8 level. We expect the "invisible" 102.000 USDJPY tractor beam to be again engaged shortly and provide market support and/or levitate stocks higher as the now standard selling in Japan, buying in the US trade pattern repeats. On the other hand, US equity futures appear to have decoupled from the pure carry trade, and instead latched on to USD weakness and EUR strength following European Q4 GDP data, which came at 0.3% on expectations of 0.2%, up from 0.1%. Considering the constant adjustments to the European definition of GDP, at this point Mongolia would have been able to demonstrate growth if it was in Europe (but apparently not Greece which once again missed GDP expectations with Q4 GDP of -2.6% vs Exp. -2.0%). Expect ES and USDJPY to recouple shortly, as they always do - the only question if the recoupling will take place lower or higher.

Heading into the North American open, stocks in Europe are seen broadly higher, supported by basic materials and industrial sectors, following earnings by ThyssenKrupp and Anglo American, as well as higher precious metal prices. At the same time, the release of better than expected GDP reports from France, Germany and Netherlands also supported demand for riskier assets, which in turn pressured USD index (-0.25%). As a result, EUR/USD and GBP/USD traded higher this morning, with GBP/USD advancing to its highest level since May’2011. Overall, trade volumes remained light, with Bunds gradually recovering initial downward price action to near unchanged level. Going forward, market participants will get to digest the release of the latest Import Price Index, U. Michigan Confidence survey and comments by ECB’s Costa and Weidmann.

Looking at the day ahead, there are a number of important data releases on the calendar. In Europe, preliminary Euroarea GDP figures are released today and consensus is expecting growth to tick up to 0.2% QoQ SA for the Euroarea, led by Germany at 0.3%. Europe will also be watching the political developments in Italy with keen interest. Indian wholesale inflation data is due as we type. The focus in the US will be on industrial production and the preliminary University of Michigan confidence report. Results from Anglo American are also due shortly after we go to print.

Headline bulletin from Bloomberg and RanSquawk

  • Sentiment supported by the release of better than expected German, French and EU-wide GDP reports.
  • After moving above the key USD 1,300 level yesterday and the 200DMA level overnight, spot gold remained bid in European trade and advanced to its highest level since November.
  • Treasuries steady, 10Y notes headed for second consecutive weekly loss after U.S. sold $70b of debt, Yellen in first appearance before Congress indicated Fed tapering remains in place despite two weak payrolls reports.
  • The euro-area economy expanded more than forecast in the final quarter of 2013, led by Germany and France, easing pressure on the European Central Bank to take action next month to counter low inflation and spur growth
  • China’s inflation stayed subdued in January while factory- gate prices extended the longest drop since the 1990s, in a sign of moderating demand in the world’s second- largest economy
  • Chinese banks’ bad loans increased for the ninth straight quarter to the highest level since the 2008 financial crisis, highlighting pressures on asset quality and profit growth as the world’s second-largest economy slows
  • Matteo Renzi is on the verge of becoming Italy’s youngest prime minister after his putsch against Enrico Letta succeeded  as the ruling Democratic Party turned against the incumbent
  • Sovereign yields mostly lower. EU peripheral spreads tighten. Asian stocks mixed, Nikkei -1.5% while Shanghai +0.83%. European stocks gain, U.S. stock-index futures mixed. WTI crude lower, copper and gold

US event calendar

  • 8:30am: Benchmark revisions of Producer Price Index; 8:30am: Import Price Index m/m, Jan., est. -0.1% (prior 0.0%)
    • Import Price Index y/y, Jan., est. -1.8% (prior -1.3%)
  • 9:15am: Industrial Production m/m, Jan., est. 0.2% (prior 0.3%)
  • Capacity Utilization, Jan., est. 79.3% (prior 79.2%)
  • Manufacturing (SIC) Production, Jan., est. 0.1% (prior 0.4%)
  • 9:55am: UofMich. Confidence, Feb. preliminary, est. 80.2 (prior 81.2)
  • 11:00am: Fed to buy $1b-$1.25b in 2036-2043 sector

Asian Headlines

Chinese CPI (Jan) Y/Y 2.5% vs. Exp. 2.4% (Prev. 2.5%) - The gain in CPI was primarily due to rising prices of vegetables, fruits and dairy products, whilst producer prices slowed due to the impact on production from the China New Year holiday.

- PPI (Jan) Y/Y -1.6% vs. Exp. -1.6% (Prev. -1.4%). (BBG)

EU & UK Headlines

Eurozone GDP SA (Q4 A) Q/Q 0.3% vs. Exp. 0.2% (Prev. 0.1%) (BBG/RTRS)
- German GDP SA (Q4 P) Q/Q 0.4% vs. Exp. 0.3% (Prev. 0.3%)
- French GDP (Q4 P) Q/Q 0.3% vs. Exp. 0.2% (Prev. -0.1%, Rev. 0.0%)
- Dutch GDP (Q4 P) Q/Q 0.7% vs. Exp. 0.3% (Prev. 0.2%)

UK home prices rose to a record level in January as spill-over effects from London and first-time buyers boosted sales, according to Acadata. (BBG)

Italian PM Letta to go to the Italian President office at 4pm local time to resign. (ANSA) This is in-line with expectations as it was reported yesterday that the PM would be resigning today, the added detail here is the exact timing of the meeting with the President.


Better than expected earnings by ThyssenKrupp and Anglo American, together with higher precious metal prices meant that industrials and basic materials outperformed on the sector breakdown. Telecommunications sector underperformed, with London listed Vodafone trading lower after analysts at UBS said that new entrant may pose threat to Vodafone India after Reliance Jio won spectrum in four major Indian metro areas.


The release of better than expected GDP reports by France, Germany and the Netherlands supported EUR in early trade, which failed to hold onto its best levels amid broad based GBP strength which benefited from the ongoing M&A related flow (Vodafone/Verizon) and advanced to its highest level since May 2011. At the same time, AUD/USD benefited from a weaker USD and also higher precious metals prices, after spot gold rose to its highest level since November and above the key 200DMA technical level.


Impala (world's largest platinum producer) said there is an increasing likelihood of a long platinum strike and it is making plans for strike that could last until May. (BBG)

ABN AMRO said the gold advance may be set to reverse and will decline on stronger US data and USD. (BBG)

BNP Paribas recommends selling Dec 2014-Dec 2015 WTI spreads and sees weakness in WTI crude at front of price curve. (BBG)

A Libyan military commander on Friday called for the suspension of the interim parliament and the formation of a presidential committee to govern until new elections are held. (RTRS)

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In conclusion, here is Jim Reid's summary of overnight events

Given today's release date of the deeply Machiavellian political drama of House of Cards, it seems somewhat apt that Italy will today see the Italian PM Letta resigning having been effectively ousted in a power struggle with party leader and mayor of Florence Matteo Renzi. It’s very House of Cards. I read yesterday that if Renzi does take over it will be Italy's 9th PM since 1992 with only two of them elected directly into the job. Its also true that Italy has had over 60 Governments since 1945 so events over the last few days are not unusual. It makes me wonder why in an era of House of Cards, The West Wing and Borgen, that Italian TV doesn't have a big budget political drama. Maybe this would be a case of fiction being less interesting than reality.

For DB's interpretation of the news Marco Stringa published a note overnight suggesting that we're now embarking on a riskier political strategy that decreases the likelihood of muddle-through and increases binary outcomes. It seems Renzi will aim at a multi-year horizon for his government (he mentioned 2018) in order to reap the benefits of economic reforms. However, his likely ambitious objectives will have to be delivered with (i) the current inefficient institutional framework, (ii) a fragile majority and (iii) a fragmented parliament. Renzi’s implied assumption is that changing the PM and the cabinet will suffice. It is a risky strategy.  The market impact of this is minimal for now but its something that has the ability to cause shocks in the future so its worth keeping abreast of. We should also note that Moody’s is due to provide an update on the Italian sovereign today. Moody’s has a Baa2 rating with a negative outlook.

Elsewhere, markets are continuing to grapple with yet another US data disappointment in the form of yesterday’s January retail sales numbers. Though the Nikkei is down 1.53% today, partly due to USDJPY (-0.4%) slipping below 102, the 20 point gain in S&P500 futures yesterday post-retail sales has underpinned gains across Asian risk assets this morning. Gains are being led by the Hang Seng (+0.4%) and ASX200 (+0.9%) but Chinese banks (-0.5%) are underperforming after the banking regulator said that sector NPLs rose in 4Q2013 to highest level since Sept 2008. Asian corporate bonds are trading several basis points tighter and its difficult to find an Asian 10yr government bond trading weaker today. The only major data release during the overnight session was Chinese CPI for January (2.5% YoY vs 2.4% expected and 2.5% prior) which continued to indicate that inflation is largely benign at the moment. Producer prices fell 1.6% YoY which was in line with consensus and is the 22nd consecutive negative PPI reading. Returning to the US retail sales report, the big question was whether the weather again dragged the data lower. As we’ve noted in the EMR in recent weeks, there’s certainly been some anecdotal commentary from companies such as McDonald’s, Ford and General Motors that sales have been impacted by the effect of January’s polar vortex. For the record, January retail sales came in at -0.4% MoM in the headline and there were negative revisions to prior month’s data. Ex auto retail sales (0% vs +0.1% expected) and ex auto & gas (-0.2% vs +0.1% expected) also came in below expectations and they also featured downward revisions to prior month’s data. The further breakdowns offered some doubts to the weather theory as some pointed out that the weather did not explain why online sales decreased by 0.6%, or why there were strong gains in building material sales.

Either way the numbers prompted a round of GDP downward revisions across the Street. According to a WSJ’s monthly survey of economists, the weather is expected to trim 0.3 percentage point from growth this quarter. Indeed, it seems US economic optimism has taken a back seat in recent weeks with the Bloomberg Economic Surprise falling to an 8-month low and gold up 5% for the month-todate. Outside of retail numbers, US jobless claims were also a touch disappointing, rising by 8k last week to 339k (vs 330k expected). DB’s Joe Lavorgna notes that given this is the survey week for February payrolls, and winter storm Pax is currently wreaking havoc across the eastern seaboard, the fear is that it will be at least another month before policymakers will be able to get “clean data” with which to gauge the health of the labor market and the underlying pace of economic activity.

Equities marked a low shortly after the release the data, and from there the Stoxx600 (-0.16%) climbed back up to the morning highs while the S&P500 (+0.58% on the day) climbed more than 1% from its opening level. Equities were further buoyed by a US$45bn buyout offer of Time Warner Cable by Comcast Corp which gave rise to hopes of the return of jumbo deal-making. The combination of a weaker dollar (Dollar index -0.44%) and a 3bp rally in UST yields helped drive a better session across EM. The MSCI EM equity index recovered about 0.5% from the lows and EM FX majors such as the BRL rallied 1.3% for its best one-day gain in more than a month. Strength in the BRL came despite Brazil releasing soft retail sales numbers of its own (Dec -0.2% vs +0.3% expected).

Looking at the day ahead, there are a number of important data releases on the calendar. In Europe, preliminary Euroarea GDP figures are released today and consensus is expecting growth to tick up to 0.2% QoQ SA for the Euroarea, led by Germany at 0.3%. Europe will also be watching the political developments in Italy with keen interest. Indian wholesale inflation data is due as we type. The focus in the US will be on industrial production and the preliminary University of Michigan confidence report. Results from Anglo American are also due shortly after we go to print.


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