No Overnight Levitation Ahead Of Sunday's Crimean Referendum

It has been a relatively quiet overnight session, aside from the  already noted news surrounding China's halt on virtual credit card payments sending Chinese online commerce stocks sliding, where despite an ongoing decline in the USDJPY which has sent the Nikkei plunging by 3.3% (and which is starting to impact Abe whose approval rating dropped in March by a whopping 5.6 points to 48.1% according to a Jiji poll), US equity futures have managed to stay surprisingly strong following yesterday's market tumble. We can only assume this has to do with short covering of positions, because we fail to see how anyone can be so foolhardy to enter risk on ahead of a weekend where the worst case scenario can be an overture to World War III following a Crimean referendum which is assured to result in the formal annexation of the peninsula by Russia.

In Asia, a senior Chinese government source said not to panic if Q1 GDP is below target and that growth as low as 7% would meet this year's jobs target. The source also added that a Reserve Requirement Ratio cut seems far off for now and that monetary policy wouldn't be prudent if RRR was cut. Earlier in the week, PBOC sources stated that they could cut the RRR if GDP growth slips below 7.5%. The Chinese RRR currently stands at 20%. Newsflow on Chinese companies coming under pressure to repay debts continues, with private steel mill Haixin failing to pay back overdue bank loans last week. However, Baoding Tianwei Baobian Electric are said to have paid bond interest on time. Much beleaguered Chaori Solar have reportedly had 6 of their trust products paid off by Zhongrong International. As a result, stocks in Asia finished the session with heavy losses, the Nikkei 225 index down over 3% at the close.

In the west, risk averse sentiment dominated the price action this morning amid concerns over the credit markets in China, together with uncertainty surrounding Russia and Ukraine ahead of the referendum in Crimea on March 16th. As a result, industrials and basic materials underperformed its peers following more reports of further distress in China relating to potential corporate bond defaults, with base metals also trading lower. At the same time, flight to quality supported flows into JPY, with the major pair falling to its lowest level since early March as the Nikkei 225 index settled the session with a net loss of over 3%.

Looking elsewhere, EUR/USD has recovered overnight Draghi inspired losses after the head of the central bank said that real interest rate spread between Eurozone and rest of world will probably fall, putting downward pressure on exchange rate. Draghi also said EUR exchange rate is becoming increasingly relevant in ECB's assessment of price stability adding that the ECB has been preparing additional non-standard measures to guard against inflation and stands ready to take further decisive action if needed. On that note, analysts at UBS believe that the recent bullish EUR trend may be due to a correction on increasing risk of fallout from Ukraine crisis and dovish comments from ECB's Draghi. Going forward, there is little in terms of tier 1 economic releases, but market participants will get to digest the release of the latest U. Michigan Confidence survey

Bulletin news summary from Bloomberg and RanSquawk

  • Risk averse sentiment dominated the price action this morning amid concerns over the credit markets in China, together with uncertainty surrounding Russia and Ukraine ahead of the referendum in Crimea on March 16th
  • A senior Chinese government source said not to panic if Q1 GDP is below target and that growth as low as 7% would meet this year's jobs target. The source also added that a Reserve Requirement Ratio cut seems far off for now and that monetary policy wouldn't be prudent if RRR was cut
  • Flight to quality which in turn weighed on USD/JPY ensured that EUR/USD was able to capitalise on a weaker USD and retrace overnight losses
    Treasury 10Y yields headed for biggest weekly decline since January as concerns on China growth, Ukraine tensions spur flight-to-quality flows.
  • Economists at UBS, Bank of America, JPMorgan and Nomura cut forecasts for Chinese growth after disappointing data fueled speculation the nation may not meet its 7.5 percent economic-expansion target for 2014.
  • U.S. Secretary of State John Kerry arrived in London to press his Russian counterpart to halt a takeover of Ukraine’s Crimean peninsula after clashes killed one person and injured dozens in the country’s east
  • Crimea votes March 16 on becoming independent or rejoining Russia, with the U.S. and Germany threatening Moscow with sanctions over its support for the secession
  • Russia’s central bank said borrowing costs will remain unchanged in the coming months after what it called a  temporary interest-rate increase last week
  • U.K. Chancellor of the Exchequer George Osborne should scale back his housing-market stimulus next week to prevent prices spiraling, according to a survey of economists
  • Millions of Americans may be exempt from Obamacare’s individual mandate under rules issued by the administration, including homeless people, homeowners who’ve been foreclosed upon, those who’ve had utilities shut off, suffered domestic violence or have had a death in the family
  • Mark Zuckerberg said he called Obama to express frustration over the government’s spying following reports the NSA had been disguising itself as Facebook to gain access to users’ computers
  • Sovereign yields mixed. EU peripheral spreads tighten. Asian equities slide, with Nikkei -3.3%, Shanghai -0.7%; European equity markets lower, U.S. stock-index  futures gain. WTI crude and copper gain, gold little changed

US Event Calendar

  • 8:30am: PPI Final Demand m/m, Feb., est. 0.2% (prior 0.2%); PPI Ex Food and Energy m/m, Feb., est. 0.1% (prior 0.2%)
  • 9:55am: UofMich. Confidence, March preliminary, est. 82 (prior 81.6)
  • 11:00am POMO: Fed to purchase $1b-$1.25b in 2036-2044 sector

EU & UK Headlines

ECB's Knot said would be wise to eventually have joint Eurobonds. (Financieele Dagblad)Germany remain opposed to such a plan, with German central bankers and government officials repeatedly stating their distaste for joint issuance.

Fitch says Eurozone deflation unlikely but a risk to periphery. (BBG)

UK Construction Output SA (Jan) M/M 1.8% vs. Exp. 1.5% (Prev. 2.0%)

UK Visible Trade Balance GBP/mln (Jan) M/M -9793 vs. Exp. -8600 (Prev. -7717, Rev. to -7662)

US Headlines

The Senate reached a bipartisan deal on Thursday that would renew federal unemployment benefits for five months. ( The plan put together by Sens. Jack Reed (D-R.I.) and Dean Heller (R-Nev.) would provide retroactive benefits to people who lost federal help after the program expired on Dec. 28
Although stocks in Europe managed to recover off the lowest levels of the session, Russian MICEX remained
under pressure and traded lower as much as 5% as market participants positioned for any sanctions that
Russia may be imposed upon as early as next week. Heading into the North American open, oil & gas sector is the
only sector in the green , supported by somewhat resilient energy prices which managed to hold onto minor gains ahead
of the eagerly awaited referendum in Crimea.

EUR/USD managed to fully retrace Draghi inspired losses overnight, which in turn supported EUR/GBP which now
trades firmly above the 100DMA line. The move was largely driven by a lower USD which suffered as a result of flight to
quality into JPY. Of note, analysts at Morgan Stanley recommended that clients go short USD/JPY, adding that a firm
break below the 101.20 level will start a down turn reaching 97.00.


CME lowered crude oil future NYMEX initial margins for specs by 13.3%, lowered natural gas Henry Hub future initial margins specs by 25%, lowered NY Harbour future initial margins for specs by 6.8%, and lowered RBOB gasoline futures initial margins for specs by 5.9% to USD 4,400 per contract from USD 4,675. (CME)

The US Senate delayed vote on Ukraine loan and Russia sanctions until the week starting the 24th of March. (BBG) Furthermore, according to an American defence official, Ukraine has asked the US for military assistance and equipment and as yet, Pentagon officials have not rejected the request but have indicated diplomacy and economic aid are the favoured options.

IEA has raised its 2014 oil demand estimate as the world economy starts to recover, increasing by 1.4mln bpd this year to a record 92.7mln bpd. According to IEA OPEC's crude oil production surged above its target for the first time in five months on the back of Iraq, who pumped the most in 35 years.(BBG)

The newly appointed CEO of Posco has announced that they will not be being seeking expansionary investment for a while. The new focus for the south Korean steel maker is to increase value by improved finances and by making the business structure more efficient. This comes after a wave of investments and acquisitions that left the Co. with high debt levels. (BBG/RTRS)

* * *

We conclude with the traditional overnight recap by DB's Jim Reid

Outside of the peripheral European markets it’s becoming harder to find a main equity index that is up YTD now with the S&P500 (-1.17% last night) one of the last to fall back into negative territory yesterday. Time is running out to turn Q1 round from a risk point of view although we should point out that credit is still holding in relatively well. One can understand the nervousness at the moment as there are a couple of almost unanalysable themes at the moment. Firstly the situation with Russia/Ukraine/Crimea and secondly China. Before we try to analyse the unanalysable we just thought we have a look at what Q1's normally tell us about the overall direction for the year using US data. If we look back at the S&P 500 since 1940, 30 of the 74 years have seen negative price returns by the end of Q1. Of these 30, 57% of the time the market finished the year down overall with an average annual price move of -14%. 40% of the time the market recovered by year end to return an average of 11% in price terms. Of the 44 times the market was up at the end of Q1, the average price return for the full year was 16%. So there is some evidence that Q1's performance does shape the year to some degree. Could it be a coincidence that we're having these issues in the first full quarter of the taper? Are we more susceptible to bad news now? We think we probably are as liquidity reduces.

Onto the main stories and its fair to say that there has been increased nervousness ahead of Sunday's referendum in Crimea. The referendum is on whether to break away from the Ukraine and join Russia. In the run-up to the referendum tensions rose yesterday as Russia began military exercises on the border and Ukraine’s parliament voted to create a 60,000-strong volunteer force. The upcoming referendum has been dismissed as illegal by Ukraine and the West however Russia continues to support it. European leaders have suggested that any attempt by the Russians to legitimise the result will be met with further consequences, generally believed to imply stronger sanctions. The Crimean parliament has already voted to break away from Ukraine and the referendum is being held with the aim of showing public endorsement of the decision with the referendum itself clearly titled towards Russia with the two options being (1) to join Russia as part of the Russian Federation or (2) for Crimea to become an independent region within Ukraine. The status quo is not on offer. In terms of the campaign leading up to the vote, reports from the BBC suggest that the campaign has been almost entirely pro-Russian with Ukrainian TV channels removed from broadcast in Crimea shortly after the referendum was called. Looking ahead to the result most commentators believe that given the Russian political and military control of the region the result is almost certainly going to be a vote for Crimea to join Russia. The Crimean parliamentary speaker said on Ukrainian TV that, the vote was a matter of “legalising opinion” and “there will be no surprises. Do not even hope.” This point is supported by the fact that according to the last census of the Crimean population (13 years ago), 58% of residents are Ethnic Russian whilst the number of Ukrainians is estimated at 24%. The Crimean parliament has formally invited OSCE election monitors, but the OSCE does not plan to send anyone because of its stance that the vote is "illegal". Indeed Reuters reported that observers from the OSCE have already been blocked from entering Crimea when shots were fired by pro-Russian troops on March 8th (Reuters).

Meanwhile, Russia plans to send 24 MPs to observe the referendum and eight election officials to oversee the vote (BBC).The result of the referendum is expected to be announced no later than 10 days after the vote. As we head into the poll, we should highlight a research piece from our Russian and Ukraine strategists published last week noting the macro implications for Russia from the increased geopolitical risk. They think that Russia could see a significant rise in capital outflows and the recent ruble weakness will likely intensify inflationary pressures later this year (mitigated to some extent by the CBR’s tightening policy). Their analysis suggests capital outflows of US$100bn could lead to an average RUBUSD rate of 39.1 (vs around 36.5 now).

Turning to Asia, the news flow from China has been fairly mixed overnight but the price action is more unambiguous with falls in the Shanghai Copper futures (-0.9%), HSCEI (-0.9%) and Hang Seng (-1.3%). The latter has been weighed by a sharp fall in Tencent (-5.1%) one of the world’s largest internet companies,
on reports that the PBoC has called for a halt to virtual credit cards operated by the company. China worries have also sent Australian mining stocks down 2.3% and the Nikkei is down 3.4% with all industry sectors suffering >2% falls. S&P500 futures (+0.1%) are slightly firmer though and US treasury yields are trading flat in Asian trading following yesterday’s 9bp move lower. In domestic Chinese equities, banks are leading the markets losses as concerns over corporate defaults continue to weigh on the sector. On the topic of potential defaults, Chinese equipment-maker Boading Tianwei, who generated headlines earlier this week as a potential second default in China’s domestic bond sector, released a statement saying that it will be meeting its coupon payment obligations on July 11th this year. The bonds are guaranteed by the company’s central-government-linked shareholder. The bonds remain suspended from trading though. There was also news that trust products linked to Shanghai Chaori (the first domestic corporate bond issuer to default last week) have been “paid off” by Zhongrong International Trust Co, suggesting that maybe the trust product’s investors may have been able to recover a substantial amount of their investment (Shanghai Securities News).

Elsewhere in Asia, there was little reaction to the latest BoJ minutes where members said that the economy and prices were on track with Bank forecasts. Away from the worries in EM, there were interesting comments from Draghi in his prepared remarks at a presentation ceremony in Vienna yesterday. Draghi said that the ECB’s efforts in repairing bank balance sheets prior to the start of the Single Supervisory Mechanism was in a sense “encouraging creative destruction in the banking sector”. He said he wanted to avoid “zombie banks” that do not lend and that interfere with the “churn process between firms entering and exiting the market that is a crucial driver of productivity”. We wouldn’t disagree with these comments. As we have argued many times in the past, low default rates are a big feature of this high liquidity world which is great if you’re a credit investor but its highly debatable whether it’s good for the wider economy in so much as it distorts the efficient allocation of capital.

Defaults are a good thing through time. However with so much debt outstanding now we may have long passed the point where you can allow defaults without causing major systemic concerns and subsequent economic weakness. On a separate matter, but also related to the banking industry, the FT wrote yesterday that Barclays is planning a “radical overhaul” of its investment bank with a new management strategy to be unveiled before the summer.

Looking at the day ahead, it’s likely that the focus will remain squarely on geopolitical developments rather than economic data. All eyes are on the Kerry-Lavrov meeting in London today, but it’s fair to say that expectations of this meeting are low at this point. The world will be watching the Crimean referendum on Sunday, but as we mentioned above, the outcome of the vote seems pretty certain at this point and it will be more about how the protagonists react to the formality. The main data releases are US producer prices and the UofMichigan consumer confidence report


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