Futures Unchanged Overnight, Remain At Nosebleed Levels

With the world still on edge over developments in the Ukraine, overnight newsflow was far less dramatic than yesterday, with no "bombshell" uttered at today's Putin press conferences in which he said nothing new and simply reiterated the party line and yet the market saw it as a full abdication, he did have some soundbites saying Russia should keep economic issues separate from politics, and that Russia should cooperate with all partners on Ukraine. Elsewhere Gazprom kept the heat on, or rather off, saying Ukraine recently paid $10 million of its nat gas debt, but that for February alone Ukraine owes $440 million for gas, which Ukraine has informed Gazprom it can't pay in full. Adding the overdue amounts for prior months, means Ukraine's current payable on gas is nearly $2 billion. Which is why almost concurrently Barosso announced that Europe would offer €1.6 billion in loans as part of EU package, which however is condition on striking a deal with the IMF (thank you US taxpayers), and that total aid could be as large as $15 billion, once again offloading the bulk of the obligations to the IMF. And so one more country joins the Troika bailout routine, and this one isn't even in the Eurozone, or the EU.

Keep an eye on Ukrainian headlines as this is where the bulk of any market volatility today will continue to be.

Elsewhere, despite further alleviation of tensions between Russia and Ukraine, stocks in Europe traded lower as market participants positioned for a slew of macroeconomic risk events due to take place later on in the week (ECB and BoE policy meetings, as well as the latest jobs report from the BLS on Friday). As a result, in spite of broadly better than expected data releases this morning, heading into the North American open, stocks are seen mixed, with the FTSE-100 index underperforming as a number of blue-chip companies traded ex-dividend. At the same time, Bunds failed to benefit from softer stocks and peripheral bond yield spread tightening, with prices under pressure as the roll trade into June contract gathered momentum.

Nevertheless, reduction in the so-called “war premium” ensured that USD/JPY remained bid, with AUD/USD also trading higher in spite of softer commodity prices, also benefiting from the release of better than expected GDP data overnight.

Going forward, market participants will get to digest the release of the latest US ISM Non-Manufacturing report and the weekly DoE data, with Bank of Canada rate decision also to take place at 1500GMT/0900CST.

Finally, after his speech in the UAE for which he got $250,000, today Ben Bernanke is set to collect more money after he points out the patently obvious, at a Leadership Conference in Johanesburg.

Bulletin news summary from Bloomberg and RanSquawk

  • Despite further alleviation of tensions between Russia and Ukraine, stocks in Europe traded lower as market participants positioned for a slew of macroeconomic risk events due to take place later on in the week.
  • Eurozone Retail Sales (Jan) M/M 1.6% vs. Exp. 0.8% (Prev. -1.6%, Rev. -1.3%) - largest since November 2001 and Eurozone Services PMI (Feb F) M/M 52.6 vs. Exp. 51.7 (Prev. 51.7) - highest since June 2011.
  • China set the 2014 growth target at 7.5% (inline with 2013), set 2014 CPI target at 3.5% (inline with 2013) and targets 2014 budget deficit about 2.1% of GDP, alongside expectations.
  • Treasuries little changed amid easing Ukraine tensions, 10Y yield holding near yesterday’s highs before ADP (est. 155k) gives market first look at Feb. jobs before Friday’s payrolls (est. 150k).
  • U.S. Secretary of State John Kerry set to meet with Russia’s Sergei Lavrov in Paris today as forces in Crimea square off; Lavrov yesterday said threat of sanctions won’t change his government’s position
  • Euro-area services growth accelerated to a 32-month high of 52.6, taking pressure off the ECB to add stimulus when policy makers meet tomorrow
  • China set a 7.5% growth target for 2014, a pace that may make it more difficult to achieve the leadership’s goals of curbing credit risks and stemming the pollution choking the nation’s biggest cities
  • The growing risk of default by a Chinese solar company may become the country’s “Bear Stearns moment,” prompting investors to reassess credit risks as they did after the U.S. lender was bailed out in 2008, according to Bank of America
  • The Obama administration is expected to announce today that Americans who kept health plans that didn’t comply with Obamacare will be able to renew them for two more years
  • Cancellations have caused political headache for Obama, who promised that people who liked health plans wouldn’t have to change them
  • Sovereign yields higher. EU peripheral spreads narrow as bund yields continue rise from 7-month low. Asian equities mostly higher, led by Nikkei; Shanghai Composite  -0.9%. European equity market mixed, with FTSE lower, DAX higher, U.S. stock-index futures decline. WTI crude falls, gold little changed, copper higher

US Event Calendar

  • 7:00am: MBA Mortgage Applications, Feb. 28 (prior -8.5%)
  • 8:15am: ADP Employment Change, Feb., est. 155k (prior 175k); Benchmark revisions to ADP data
  • 10:00am: ISM Non-Manufacturing, Feb., est. 53.5 (prior 54) Central Banks
  • 8:30am: Former Fed Chairman Bernanke speaks in South Africa
  • 2:00pm: Fed releases Beige Book
  • 7:00pm: Fed’s Fisher speaks in Mexico City
  • 8:30pm: Fed’s Williams speaks in Seattle Supply
  • 11:00am: Fed to purchase $2.25b-$2.75b in 2019-2021 sector

Asian Headlines

Shanghai Comp underperformed overnight following reports that Shanghai Chaori Solar Energy Science & Technology said it may not be able to make interest payment in full on March 7, highlighting general concerns over credit markets in China. At the same time, the Nikkei 225 index finished in the green, benefiting from a weaker JPY, with JPY swaps curve bear-steepening as the risk-off positions were unwound.

China set the 2014 growth target at 7.5% (inline with 2013), set 2014 CPI target at 3.5% (inline with 2013) and targets 2014 budget deficit about 2.1% of GDP, alongside expectations.

Chinese HSBC Services PMI (Feb) M/M 51.0 (Prev. 50.7) (BBG)

EU & UK Headlines

Eurozone (Q4 P) GDP SA Q/Q 0.3% vs Exp. 0.3% (Prev. 0.3%)

Eurozone Retail Sales (Jan) M/M 1.6% vs. Exp. 0.8% (Prev. -1.6%, Rev. -1.3%) - largest since November 2001.

Eurozone PMI Service (Feb F) M/M 52.6 vs. Exp. 51.7 (Prev. 51.7) - highest since June 2011.
- Eurozone PMI Composite (Feb F) M/M 53.3 vs. Exp. 52.7 (Prev. 52.7) - highest since June 2011.
- German PMI Services (Feb F) M/M 55.9 vs. Exp. 55.4 (Prev. 53.1) - highest since June 2011.
- German PMI Composite (Feb F) M/M 56.4 vs. Exp. 56.1 (Prev. 55.5) - highest since June 2011.
- French PMI Services (Feb F) M/M 47.2 vs Exp. 46.9 (Prev. 46.9) - 8 month low
- Italian PMI Services (Feb) M/M 52.9 vs. Exp. 49.8 (Prev. 49.4) - highest since March 2011
- Spanish PMI Services (Feb) M/M 53.7 (Prev. 54.9)
UK PMI Services (Feb) M/M 58.2 vs. Exp. 58.0 (Prev. 58.3) - lowest since June 2013.
UK PMI Services Employment 56.0 (Prev. 55.7) - record high.

US Headlines

Fed's Lacker sees reasonably high hurdle to changing taper pace and sees first interest rate hike in early 2015. He also added that he's worried Fed won't raise rates soon enough. (BBG)


Even though stocks failed to benefit from further scaling back of risk premia built up over recent days surrounding the situation in Ukraine, health care was among the worst performing sectors, indicating that the selling pressure is more to do with positioning ahead of risk events. At the same time, oil & gas related stocks remained under pressure, as energy complex continued to suffer amid lessening of fears of a military conflict in Ukraine.


The release of better than expected UK Services PMI data, GBP/USD traded steady this morning, as market participants remained sidelined ahead of the MPC meeting on Thursday. At the same time, EUR/USD also failed to benefit from broadly better than expected macroeconomic data and is seen marginally lower, as market participants continue to rule out probability of more rate cuts, as evidenced in the form of an inverted EONIA ECB dates curve.


US official said US President Obama does not see an escalation of Ukrainian tensions beyond Crimea. The US official also stated that US weighs tiered, unilateral sanctions on Russia. The official added the US will not participate in G8 summit in Sochi unless Moscow reverses on Ukraine. (BBG)

US API Crude Oil Inventories (Feb 28) W/W 1170k vs. Prev. 822k
- Cushing Crude Inventories (Feb 28) W/W -2630k vs. Prev. -1,070k
- Gasoline Inventories (Feb 28) W/W -1200k vs. Prev. -314k
- Distillate Inventories (Feb 28) W/W -270k vs. Prev. -693k

Palladium outperformed this morning, printing new 2014 highs as sanctions fears on Russia push prices higher. Additionally, platinum holdings in ETPs has expanded to a record 78.3444 metric tonnes, climbing 1.6% yesterday, the biggest one day increase since August 26th. (BBG)

Libya's El Sharara oil field remains shut and the sit in protest is on-going with no sign of production resuming, according to a field manager. Earlier today it was reported that Libya's El Sharara oil field was set to reopen in 2 days, according to a protester group, after the Libyan Govt. reached a deal yesterday to end protests in the east of the country. (BBG)


In conclusion, here is Jim Reid's overnight recap:

With the S&P500 (+1.53%) once again at all-time highs, and the Stoxx600 (+2.06%) erasing pretty much all of Monday’s losses, it’s been an impressively quick rebound from the sober tone that started the week. It’s still too early to give the all clear, and with Russian forces reportedly still very much in operational control of the Crimean peninsula we remain largely at the behest of headlines from the Ukraine. An example of the market’s nervousness came late yesterday when news of a Russian intercontinental ballistic missile launch caused a 5pt drop in the S&P500 during the second half of the US trading session. Russian state news agencies described a successful, if awkwardly-timed, test-launch of an advanced ICBM that hit a target in Kazakhstan near the Caspian Sea (AFP). This came after reports of shots fired outside the Belbek air base in Crimea occupied by Russian troops (BBC) and there were unconfirmed reports that Russian forces had tried to board an Ukrainian navy vessel (NYT). While both Putin and Obama talk tough, the market will continue to bounce around with these headlines – but maybe some attention can shift to today’s ADP employment, tomorrow’s ECB meeting and Friday’s non-farm payrolls.

Taking a look at overnight markets, Asian equities are trading with a constructive tone as they play catch up to the rebound in Europe and the US yesterday. A number of bourses are trading with 0.5%+ gains including the Nikkei (+1.4%), ASX200 (+0.85%) and KOSPI (+1.0%). S&P500 futures (-0.05%) are consolidating at around 1870 overnight following the outsized gain yesterday. The exception to the better tone is in China where domestic equities are trading about 0.4% lower, weighed by banks (-0.7%) as talk of a first-time onshore corporate bond default gathers steam on the newswires (more below). For the moment though, offshore Chinese USD investment grade bonds are trading 3- 5bp firmer and the Asian IG credit index is 4bp tighter today. In other news, the Chinese government revealed that its growth target for 2014 is 7.5%, which is probably what most people had expected to be announced at the National People’s Congress which began today. China also plans a 2014 budget deficit of RMB 1.35 trillion while the inflation and M2 growth target was set at 3.5% and 13% respectively, WSJ reported. On the topic of China, our fixed income strategists note that interbank liquidity conditions have eased noticeably since January reflecting post-Lunar New Year seasonals and a spike in RMB supply as a result of recent selling against the USD. In the short term they think liquidity conditions will be supportive during the March political meetings (such as this week’s National People’s Congress), but they note the upside risks to rates in the longer term and recommend positioning for a bear-steepening.

Despite the reports of improved domestic liquidity of late, a number of press articles are suggesting that China could see its first domestic corporate bond default as early as this Friday, March 7th (WSJ and Financial Times). Solar cell manufacturer Shanghai Chaori Solar Energy is due to make an RMB89.8m (or US$15m) annual coupon payment on Friday in relation to a RMB 1bn bond (face value) which it issued two years ago. The company has made a statement to the Shenzhen stock exchange saying that it has only raised RMB 4m to repay bondholders on March 7th, and the company’s bonds and stock have been suspended from trading. While there have been a number of offshore Chinese corporate defaults over the years (e.g. in the USD bond market), this would be a first for the domestic market which is worth around US$1.5 trillion according to the WSJ. How the Chinese authorities deal with this looming default will be an interesting test case, particularly as there are a couple of other potential distress cases in the domestic corporate bond market. Indeed Bloomberg reports that China’s renewable energy industry faces US$7.7bn in bond maturities this year.

Will we see another local government-sponsored bailout as was seen in recent trust product restructurings, or will the authorities deem that at RMB1bn in face value (or US$162m) this bond is too small to be “systemic”? Something to watch out for over the next couple of days.

Looking at yesterday’s markets in more detail, we saw a cautious rebound across most markets with safe-haven assets generally better offered and risk assets bid. Case in point were European banks (+2.4%) which were the outperformers yesterday after being laggards on Monday. Raiffeissen (+5.8%), ING (+3.9%) and Socgen (+3.4%) recovered most of their Ukraine and Russiain-spired losses from the previous day. The European senior financial index rallied 4bp, outpacing a 3bp tightening in European Main. With the easing of the flight to quality theme, 10yr UST yields unwound all of its tightening over the last week, adding 9.6bp in what was the largest move upwards in four months in yield terms. Brent crude closed at -1.7% and gold lost 1.2% on as markets priced in a smaller geopolitical risk premium.

After a volatile last couple of days that saw pent up supply of corporate credit issuance, the new issue market sprang back to life yesterday in the EU and US. In the US high grade market, a total of US$19.5bn of new investment grade deals were priced coming from 13 issuers across 20 tranches resulting in the busiest new issue day of 2014. The new issues took advantage of more than US$79bn in investor orders, allowing issuers to tighten pricing by as much as 20bp from initial price talk in some cases. In addition to that there were a number of deals which priced with negative new issue concessions. The US high yield market also had a firm day, raising US$2.4bn across five deals. Despite the surge of new supply, the secondary market held relatively firm with the iBoxx USD corporate index firming 2bp and CDX IG index firming 3bp, with some suggesting that this reflects the vast pool of liquidity available in the US investment grade market.

Turning to the day ahead, we have a range of data in Europe and the US including euro area GDP (2nd estimates) and final Euro service sector PMIs. In advance of Friday’s US payrolls, the ADP employment report will be the headline event for today. For the record DB is calling for a +160k headline in today’s report, which is slightly higher than consensus at around +155k but lower than January’s +175k outcome. The US non-manufacturing ISM index, specifically the employment subcomponent, will also provide some clues as to the direction of payrolls. Consensus is looking for a print of 53.5 on the headline (DB calling for 55.0). Apart from that, the Bank of Canada meets today and the Fed releases its Beige Book. Bernanke is due to speak at a Leadership Conference in Johannesburg and the Dallas Fed’s Fisher speaks today in Mexico City.


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