Futures Fail To Rally On Lack Of Yen Carry Levitation

Stocks in Europe failed to hold onto early gains and gradually moved into negative territory, albeit minor, as concerns over money markets in China gathered attention yet again after benchmark rates fell to lowest since May 2012. Nevertheless, basic materials outperformed on the sector breakdown, as energy and metal prices rebounded following yesterday’s weaker than expected Chinese data inspired sell off. At the same time, Bunds remained supported by the cautious sentiment, while EUR/USD came under pressure following comments by ECB's Constancio who said that financial markets misinterpreted us a little, can still cut rates and implement QE or buy assets. Going forward, market participants will get to digest the release of the weekly API report after the closing bell on Wall Street and the US Treasury will kick off this week’s issuance with a sale of USD 30bln in 3y notes.

Bulletin headline summary from Bloomberg and RanSquawk

  • ECB's Constancio says financial markets misinterpreted us a little, can still cut rates and implement QE or buy assets.
  • BoE's Carney says range of views on MPC on spare capacity, sees equilibrium jobless rate at around 6%, equilibrium rate of unemployment has gone down and he personally sees spare capacity higher than 1.5%.
  • ECB says AQR to review bank processes, credit files and collateral, with reported capital ratios to be adjusted for AQR during July.
  • Treasuries drift lower, 5Y-10Y yield rise by ~1bp before week’s auctions begin with $30b 3Y notes; yield 0.803% in WI trading after drawing 0.715% in Feb.
  • The Bank of Japan maintained record easing, keeping ammunition as an April sales-tax bump threatens to trigger the deepest one-quarter contraction since the March 2011 earthquake
  • Wall Street’s biggest firms are close to agreeing on a plan that would safeguard the financial markets from the crippling fire sales that engulfed Lehman Brothers Holdings Inc. and Bear Stearns Cos
  • China’s central bank Governor Zhou Xiaochuan said deposit rates will be liberalized in one to two years, as the nation expands the role of markets even amid an economic slowdown and risks from a credit boom
  • The ECB said it will look for capital shortfalls in euro- area banks by examining more than 3.72 trillion euros ($5.16 trillion) in assets in on-site checks
  • U.K. factory production rose 0.4% in January, more than forecast; industrial production rose 0.1%, less than forecast, as bad weather hit oil and gas output
  • Russia showed no signs of yielding in the Crimea standoff as Ukraine bolstered its defenses before its prime minister meets Obama tomorrow
  • The probe into the disappearance of Flight 370 took another twist today as Malaysian authorities said one of the two people who boarded the plane with stolen passports was an Iranian who had no links to terror groups
  • Lois Lerner, who oversaw the IRS scrutiny of Tea Party groups, wrote in emails that political nonprofits might file a court case that led the IRS to accelerate the release of specific information about groups denied tax-exempt status; a House panel is building a contempt case against her
  • Sovereign yields mostly lower. EU peripheral spreads widen. Asian equities rise. European equity markets gain, U.S. stock-index futures fall. WTI crude, gold and copper higher

US Event Calendar

  • 7:30am: NFIB Small Business Optimism, Feb., est. 93.8 (prior 94.1)
  • 10:00am: JOLTs Job Openings, Jan., est.  4,015m (prior 3.99m)
  • 10:00am: Wholesale Inventories, Jan., est. 0.4% (prior 0.3%)
  • Wholesale Sales, Jan., est. 0.2% (prior 0.5%) Central Banks
  • 5:30am: Bank of England’s Carney and others speak in London Supply
  • 11:00am: Fed to purchase $1b-$1.25b in 2036-2044 sector

Asian Headlines

The BoJ kept monetary policy unchanged, alongside expectations. The BoJ retained its plan for JPY 60trl-70trl annual rise in monetary base. The BoJ cut its view on exports but upgraded its view on industrial production and capex. (BBG)

EU & UK Headlines

ECB's Constancio says financial markets misinterpreted us a little, can still cut rates and implement QE or buy assets. (MNI)

BoE's Carney says range of views on MPC on spare capacity, sees equilibrium jobless rate at around 6%, equilibrium rate of unemployment has gone down and he personally sees spare capacity higher than 1.5%.

He also said that it is best to adjust interest rates by more than 0.25% before reversing QE (BBG/RTRS) BoE's Weale says had thought inflation would remain above the target for 'rather longer'

UK Manufacturing Production (Jan) M/M 0.4% vs Exp. 0.3% (Prev. 0.3%, Rev. 0.4%) - Manufacturing growth driven by rubber and plastic products. Also of note, monthly pharmaceuticals output falls most since 1968.

UK Industrial Production (Jan) M/M 0.1% vs Exp. 0.2% (Prev. 0.4%, Rev. 0.5%)

UK BRC Sales Like-For-Like (Feb) Y/Y -1.0% vs. Exp. 1.8% (Prev. 3.9%); 1st decline in 10 months. (BBG)

KPMG said that overall sales were pretty flat which serves a reminder that the recovery was far from certain. (RTRS)

ECB says AQR to review bank processes, credit files and collateral, with reported capital ratios to be adjusted for AQR during July. AQR, stress tests may require banks to raise capital and says assets covered represents 58% of RWA of 128 banks. (BBG)

US Headlines

Several U.S. institutional investors said they are closely monitoring the developments at Pimco, the world's largest bond firm, in the wake of Mohamed El-Erian's abrupt resignation as CEO and ensuing acrimony between him and co-founder Bill Gross.

The investors, including retirement systems, have formally put Pimco on "watch lists," a signal that they will keep a much closer eye its performance than usual.


As the session progressed, stocks in Europe came off the best levels of the session as the cautious sentiment surrounding money market rates in China, together with better bid Bunds, weighed on appetite for riskier assets. In terms of notable movers, London listed Morrison's shares fell over 3%, following the release of weaker than expected UK BRC Sales Like-For-Like report, which posted 1st decline in 10 months. KPMG said that overall sales were pretty flat which serves a reminder that the recovery was far from certain.


Comments by ECB's Constancio prompted modest flattening of the Euribor curve, which was consequently followed by broad based EUR weakness. At the same time, while the release of mixed Industrial and Manufacturing Production reports failed to move GBP/USD, the pair remained a by-product of a firmer USD which benefited from a risk off sentiment.


Saudi Arabia's February crude oil output inched up to 9.849mln bpd, up from 9.767 in January. (RTRS)

Exxon's Black Sea gas drilling may be threatened by the referendum in Crimea. Exxon Mobil sought the rights to drill in 2012 and it is unclear as to the outcome if Crimea becomes part of Russia. (BBG)

Citigroup say that the low iron ore prices are here to stay. With increases in demand and the surprise deficit of China’s trade balance, iron ore saw the biggest single day drop in 4 years Monday. (RTRS)

Freeport-McMoRan Copper and Gold Inc. are cutting down their Indonesian output by 60%. The Co. halted exports two months ago and are refusing to pay raising export tax as part of the countries new mining rules. (RTRS)

DB's Jim Reid concludes the overnight summary

Sharp falls in Chinese growth-related assets failed to materially dampen the mood of the S&P 500 (-0.05%) which managed to grind out a virtually flat day yesterday after being notably lower for most of the session. While we are seeing better sentiment in Asia this morning, Monday was indeed a day when many questioned the Chinese growth story with a 8.3% fall in import iron ore prices, a 4% fall in Shanghai copper futures (down another 2.4% overnight) and a 2.9% fall in the Shanghai Composite equity index. The fall in Chinese import iron ore prices was the worst one day performance since August 2009 and the second worst day on record. While there were media reports of lower demand for industrial commodities from tightening controls on the steel and cement sectors (FT, Reuters), we shouldn’t rule out the impact of the recent unwinding of yuan carry trades many of which have been funded by loans collateralised by iron ore and copper inventories.

Looking at a longer time horizon, it’s interesting that in the 5 year period since the lows on March 9th 2009 the S&P 500 has gone up by over 2.7 times in price terms, whereas the Shanghai Composite is actually slightly down. The latter now being at its lowest level since January 2009 and at a level first breached in the summer of 2000. The Chinese economy has grown 68% and 470% in nominal terms since these two dates. So it does seem that the market is telling us something quite different from the bottoms-up perspective to what the top down has been telling us. Surely such a divergence can't go on forever?

With the high uncertainty over the impact of CNY timings and the huge range of opinion of the scale of 2013's over invoicing, the numbers coming up next month will be crucial as they should be a much purer reflection of activity in China. So an important month coming up. Unfortunately it might take longer to see cleaner US data. I spoke with Joe LaVorgna yesterday and he was suggesting that we may not actually get clean data until maybe July (i.e. the June numbers). The rationale being that if he's correct March-May data will see the payback from the weather before normality returns. Interestingly this week is payroll survey week and snow is forecast again.

Coming back to Asia, most bourses are seeing a small retracement of yesterday's selloff with the Nikkei, Hang Seng and HSCEI seeing small gains. Chinese equities are once again lagging (Shanghai Comp -0.3%). In Japan, the BoJ policy meeting ended with no major surprises, but there was some small selling in USDJPY and Nikkei futures after the central bank cut its view on exports (not surprising after recent trade data) and upgraded its forecast for capex and industrial production. USDJPY pared back gains to trade unchanged at 103.3 this morning.

Australian iron ore mining giants Rio Tinto and BHP assured the market overnight that their long term forecasts for iron ore were still intact but Rio did warn that a credit squeeze and high iron ore stock piles in China were a driver behind yesterday’s price drop. Rio Tinto (+0.1%) and BHP (-0.3%) stock are trading with a more steady footing today after sharp falls in Sydney and London trading yesterday. Chinese onshore rates continue to collapse lower today, helped presumably by an increase in CNY supply given the recent yuan depreciation. This is extending the widening seen in Chinese corporate bonds following last week’s first default by Shanghai Chaori Energy. On the topic of Chaori Energy, it was interesting to see reports today that the company may have at least four outstanding trust loans due this year, and a further two trust loans due in subsequent years, according to the IFR Asia. If confirmed, Chaori’s troubles could provide not only a test case for China’s onshore bond market, but also an interesting example of potential troubles in the country’s burgeoning trust loans sector.

Elsewhere in the EM world, credit spreads edged wider and equities took a small hit lower yesterday but the general consensus was that the price action was orderly despite notable exceptions such as Turkey (10yr +16bp). Despite the weak China sentiment, there was actually impressive demand for a couple of benchmark-sized EM corporate and sovereign bond deals. Brazilian oil company Petrobas attracted a US$23bn order book for a jumbo six-tranche $8.5bn USD bond issue including the issuance of 30 year paper. The country of Azerbaijan issued US$1.24bn in its debut bond deal in international markets, attracting an orderbook of almost $4bn despite turbulence in the Caspian Sea region caused by the political tension in Crimea. On the topic of the Ukraine, further reports filtered out of Crimea suggesting that Russian forces were consolidating their control of the peninsula. Russian troops reportedly opened fire as they forced entry into a Ukrainian military post in Crimea but no injuries were reported (Reuters). There were reports that the Ukrainian military had begun drills in an effort to test the combat-readiness of its troops. Tensions are
likely to escalate into Sunday’s Crimean referendum, which both the Ukrainian government and its international allies maintain is in contravention to the country’s constitution.

Back in DM, US treasuries barely budged ending the day at 2.78% with little in terms of data flow to prompt buying or selling. In terms of Fed speak, Charles Evans (non voter, dove) reiterated that the Fed’s hurdle for altering QE tapering is “pretty high” and repeated that the Fed will need to change communication on rates. Plosser (FOMC voter and a hawk) said that it is important that the Fed send a signal that we are committed to the current pace of tapering. The WSJ’s Hilsenrath wrote that the Fed is formulating a new plan to exit unconventional policy although the suggestions have been floated for a while.

The article said that the Fed could leave excess reserves in the banking system for years and may never remove them. In addition to paying interest on excess bank reserves, the Fed would anchor rates through a program using reverse repurchase agreements. Rather than draining money from the financial system, and setting interest rates by managing its supply, the Fed would set interest rates by managing the cost of money (WSJ).

Turning to the day ahead, German trade and UK industrial production will be the main data releases in the morning session. Governor Carney is scheduled to testify at the UK Parliament’s Treasury Committee today with the subject of discussion being the BoE’s latest inflation report. The US data flow remains light with wholesale inventories and JOLTs job openings scheduled for today. In the EM world, Brazil’s January industrial production will be closely watched today.


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