Overnight Pump (Then Dump) - Day 6

By this point, one has to be impressed at the resilience with which algos repeat the same pattern over and over again, hoping for a different outcome. It is now the 6th day in a row that the JPY-carry trade (be it USDJPY, EURJPY or AUDJPY) driven levitation has pushed equity futures smartly up in overnight trading. And by all accounts - in the absence of ugly macro news which in today's sparse data line up (just Personal Income and Spending and UMich consumer condfidence) - the same post early highs fade we have seen every day in the past week will repeat again.

The overnight euphoria was driven primarily by Europe where Bloomberg reported 2 Year Spanish yields have traded below those of the UK for the first time since 2009. And since it is obviously not the strong fundamentals, what is continuing to happen, as has been the case since October 2013, is everyone is pricing in the ECB's QE, which even Weidmann is openly talkin about  now, which simply means it will most likely never actually happen, certainly not until it is too late.

In the meantime, all the banks are getting on the bandwagon, most notably the bank that started it all, BNP, saying the risk-reward around April 3 meeting is still skewed in favor of “ECB QE” trades as investors begin to acknowledge likelihood of asset purchases later this year. This, even as BNMP admits that in its base-case view, the ECB won’t implement QE until 2H, well later than its earlier forecasts. Still, "markets will price in move well before its actual execution" and "lack of announcement next week probably wouldn’t significantly hurt QE trades, even as expectations for such a move have risen."  Bottom line, Europe's euphoria now hinges on the ECB doing what even the Fed is tapering. One wonders how much longer the market will give Draghi credit for before it actually demands to see some action.

Turning to today’s calendar, in Europe the focus will be on the latest German inflation print, especially with the April ECB meeting looming next week. The Euroarea CPI report follows on Monday. In the US the February personal income and spending numbers are released together with the latest PCE deflator (consensus is around 1.1%). The Kansas City Fed’s George will be speaking on the US economy. On Sunday, Turkey will be holding local elections which are being billed as a virtual referendum on PM Erdogan’s administration.

Bulletin news summary from RanSquawk and Bloomberg

  • Global stock futures trade higher on the back of increasing expectations of imminent ECB easing ahead of the bank's meeting next Thursday
  • Deteriorating Spanish and German CPIs increase the onus on the ECB to take action to stem deflation
  • Fed Watcher Hilsenrath said Fed officials suggest they have not moved forward on technical decisions needed to be made before raising rates

US Event Calendar

  • 8:30 - Personal income (est. 0.3%); PCE deflator (0.1%) at 8:30am;
  • 9:55 - UMich confidence (est. 80.5)
  • 12:00 - Industrial Production Benchmark Revisions
  • 12:45 - FOMC member George speaks
  • 11:00 - POMO - Fed to purchase $1b-$1.25b in 2036-2044 sector

Asian Headlines

Chinese Premier Li said China has policy tools for economy fluctuations and that China is to selectively unveil measures. (Xinhua) Expectations are for China to resort to growth-supportive measures such as infrastructure as opposed to large-scale fiscal stimulus and monetary accommodation. Despite the comments from Li, a state economist threw cold water on these comments by stating China's government is broadly satisfied with economic conditions in Q1 and does not plan to announce new stimulus measures. (MNI) The Shanghai Composite closed with losses of 0.3% after paring early gains.

10yr JGBs closed lower (-5 ticks at 144.71) amid quiet trade, while the Nikkei 225 traded mostly range-bound ahead of the impending sales tax hike, but did see prices supported in late trade to close the session with mild gains of 0.5%. (RANsquawk)

EU & UK Headlines

The regional German CPIs came in mostly softer than expected, with the first Saxony reading kicking off the releases and putting downward pressure upon EUR from the open. 1300GMT does see the release of the German CPI figure, however as always the regional CPIs have presented an impression of what is to come. (BBG/RANsquawk) The deterioration of the inflation outlook has pushed markets to price in easing further, with the Euribor curve flatter, the EUR at the lowest levels in four weeks and Jun-14 Bund futures printing contract highs.

Barclays preliminary Sterling month-end extensions: (-0.02y) (12m avg. +0.06y)

Barclays preliminary pan-Euro agg month-end extensions: (+0.07y) (12m avg. +0.08y)

US Headlines

Fed's Evans (non-voter, dove) said he sees rates rising in H2 2015, would prefer later and that rates are to rise at least six months after QE. (BBG)

Fed Watcher Hilsenrath has said Fed officials suggest they have not moved forward on technical decisions needed to be made before raising rates, with officials expecting to manage interest rates using rate Fed pays to banks on excess reserves parked at central bank. HIlsenrath also said a new program using reverse repos being tested by NY Fed is one potential alternative and Fed officials are moving slowly in talks on how to manage mechanics of interest rate increases.

Barclays preliminary US Tsys month-end extensions:(+0.07y) (12m avg. +0.08y)


Wal-Mart has sued Visa for more than USD 5bln, after claiming the card network charges unreasonably high fees when the retailer's customers paid with cards. (WSJ) Visa are the Dow Jones' largest component, with an index weighting of 8.5%.


Goldman Sachs have revised their USD/CAD forecast up substantially from parity to CAD 1.1400 by the end of 2014, citing very low Canadian inflation. Separately on USD/JPY, Citigroup said USD/JPY is to weaken to 108-110 in June-July.


As we head into the last North American open of the week WTI crude futures are seen trading higher, as the improving economic outlook gives risk-on sentiment strength, helping prices across the energy complex rise with the exception of NatGas futures, which trade to the downside as reports suggest cold weather will not be as severe as recent periods.


* * *

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

Another uninspiring US session failed to take the limelight away from the relentless run in EM over the last week or so. Indeed, looking at the respective performance of MSCI EM index and the S&P 500 from the Tuesday prior to the FOMC till now, the former has outperformed the latter by around 3.7 percentage points (+2.5% vs -1.2% respectively) which is surprising many given last week’s relatively hawkish FOMC. We should note however, that within EM itself there has been a fairly large dispersion in performance reflecting in part idiosyncratic headlines. For example, Brazil’s Ibovespa and China’s HSCEI are up 7.5% and 6.9% respectively since just prior to the FOMC, with the former helped by better data/policies and the latter by expectations of fiscal or monetary stimulus. This compares to EM laggards such as Russia’s MICEX which is -0.3% over the same time period as it grapples with geopolitical risks in the form of Western sanctions.

Putting aside the recent dispersion, yesterday proved to be a strong day for virtually the entire EM complex and the strength carried right through to the close despite the wobbles in the S&P 500. In currencies, the MXN (+0.18%) and BRL (+1.91%) closed at the highs against the US dollar. EM rates in Turkey (-30bp) and Russia (-7bp) traced tighter despite some mixed geopolitical headlines. Equity bourses such as Brazil’s (+3.5%) notched up its eighth gain in the last nine days as investors took comfort in the better than expected central government fiscal balance in February (-3.1BN vs -4.0BN expected) while some were unsure of what to make of the latest polls which suggested that President Dilma Rousseff’s popularity had slipped to 51% from 56% but was still favoured to win October’s election (Reuters). We also learnt yesterday that the Brazilian unemployment rate rose to 5.1% in February from 4.8% previously, causing local rates to compress as markets priced in a slower path of rate hikes.

The firm EM backdrop has set a positive tone for Asian markets on Thursday. Gains are being recorded across almost all equity indices in particular the Hang Seng China Enterprises Index (+1.6%) which is leading the region’s gains. State affiliated Xinhua news agency quoted Chinese Premier Li as urging a number of provincial leaders to deepen economic reforms and restructuring so as to maintain the country’s growth at a reasonable pace – this is perhaps boosting sentiment today. Adding to the anecdotal evidence of funding stresses is parts of the Chinese economy, the WSJ is reporting that some Chinese importers of agricultural commodities are reneging on deals as a result of credit tightening. Speaking in Hong Kong, the Fed’s Charles Evans said that he expects the Fed Funds rate to be 1.25% at end 2016, clearly at the low end of the Fed’s “dots”.

On the topic of China, DB’s economists have revised down their 2014 GDP growth forecast to 7.8% from 8.6% previously and the 2015 growth forecast to 8.0% from 8.2%. DB’s forecast reflects a slower-than-expected start to the year and an expectation that as export growth returns as a source of support to growth, the government will scale back investment further in order to rebalance growth away from investment and towards consumption. DB expects there will be some modest monetary and fiscal stimulus – much of which has perhaps already been announced. Hence, the view from our economists is that Q1 will mark the low-point of growth this cycle at perhaps 7.4%. DB don’t expect RRR cuts or LDR increases, but guidance from the PBOC is likely to be more accommodative. There may be scope for more stimulus with CPI inflation to slow to 2.2% this year from 2.6% last year. Similarly, our economists think fiscal policy will be modestly expansionary, supporting investment growth by increasing infrastructure and social services spending.

In Japan, the Nikkei (+0.04%) and USDJPY (-0.03%) are both unchanged amid a general sense of cautiousness ahead of next week’s sales tax hike. As Japanese investors ponder the impact of next week’s contractionary fiscal policy and the BoJ’s options, the FT reports that there has been a rush from Japanese retail buyers to snap up small gold bars in Japan. Some jewelry dealers are reporting that sales are up 500pc this month as customers rush in last minute purchases before sales taxes come into effect. The FT is also positing an alternative theory that retail investors are buying gold as both an inflation hedge and as a safe haven in case deflation returns. On a related note, the latest Japanese inflation numbers were released today showing inflation steady at 1.5% YoY in February, in line with expectations and slightly ahead of last month’s 1.4%. CPI ex-fresh food remained at 1.3% for the third straight month and real household spending from the Feb Household survey fell 1.5% MoM.

Coming back to yesterday, in Europe the EUR had another soft session (down 0.3%) as markets weigh up the recent ECB commentary and with eyes on today’s German CPI, Monday’s euroarea CPI and next week’s ECB meeting. The S&P500 (-0.19%) once again drifted after the morning session in what has become a recurring theme over the last few days. Stocks were led lower by the banking sector (-1.04%) but it was interesting to see that the banking sector actually traded higher shortly after the opening bell despite the controversy over the Fed’s stress tests from the day before. Amongst the worst performers is Citigroup (-5.4%) which was unsurprising as one of the five banks whose capital plans were rejected by the Fed. The FT reported late yesterday that a number of bank executives were critical of the Fed stress tests for being “opaque” and “too much of a black box”. According to the article, the Fed asserts it is transparent about its process while maintaining some mystique to stop banks “studying for the test”.

On the fixed income side, gilts and bunds ground tighter in yield as US treasury yields shifted lower by another basis point to 2.681% - in contrast to Dec15 Eurodollar futures which moved up by 1.5bp to 1.17%. Curve flattening remains a central theme in the UST market. The intermediate part of the UST curve was helped by another well received UST auction, where US$29bn of 7yr notes were auctioned with the yield stopping through the market. Direct bidders took a relatively high one-third of the auction and dealers were left with 26%. US data flow was a bit of a wash, with initial jobless claims better (311k vs 320k prev) but pending home sales were down -0.8% in February, which is about 1ppt less than expected. The third estimate of US Q4 GDP came in at 2.6% (vs 2.7% expected) and the Core PCE remained at 1.3%.

Turning to today’s calendar, in Europe the focus will be on the latest German inflation print, especially with the April ECB meeting looming next week. The Euroarea CPI report follows on Monday. In the US the February personal income and spending numbers are released together with the latest PCE deflator (consensus is around 1.1%). The Kansas City Fed’s George will be speaking on the US economy. On Sunday, Turkey will be holding local elections which are being billed as a virtual referendum on PM Erdogan’s administration.