"Fade The Early Ramp" Watch - Day 7

After ramping in overnight trading, following the spike in Japanese stocks following another batch of disappointing economic data out of the land of the rising sun and setting Abenomics which sent the USDJPY, and its derivative Nikkei225 surging, US equity futures have pared some of the gains in what now appears a daily phenomenon. Keep in mind, the pattern over the past 6 consecutive days has been to ramp stocks into the US open, followed by a determined fade all the way into the close, led by "growthy" stocks and what appears to be an ongoing unwind of a hedge fund basket by one or more entities. Could the entire market be pushed lower because one fund is unwinding (or liquidiating)? Normally we would say no, but with liquidity as non-existant as it is right now, nothing would surprise us any more.

Was there a goalseeked narrative for the fade? According to RanSquawk, the "Initial risk on sentiment buoyed by reports of constructive talks between US and Russian officials saw stocks gap higher at the open which gradually ebbed away, as focus turned on the looming risk events today and later this week. The release of weaker than expected EU CPI data failed to weigh on EUR, as comments by ECB's Weidmann who downplayed the need to act on low inflation caused by cyclical factors, weighed on Bunds since the open and encouraged scaling back of expectations of ECB QE built up last week."

Finally, the French CAC index underperformed its peers amid speculation over potential cabinet reshuffle following French municipal elections over the weekend which handed more ground to the far-right and further undermined Hollande's efforts to conduct reforms.

Bulletin headline summary:

  • Treasuries decline, 5Y and 30Y lead, as global stocks mostly higher on last day of quarter; week brings ECB meeting and Draghi press conference Thursday, nonfarm payrolls Friday.
  • Consumer prices rose 0.5% in March, below 0.6% median estimate and the slowest pace in over four years, keeping pressure on the ECB to take action
  • Bundesbank President and ECB council member Weidmann said Saturday current disinflation due to cyclical, not structural factors
  • The specter of default in China’s trust loans market is deepening the distress of property developers that also borrowed in dollars
  • French President Francois Hollande’s Socialists lost control of cities across the country yesterday, as voters punished the party for record joblessness
  • Secretary of State Kerry said Russia must pull forces back from Ukraine’s border as both sides seek a diplomatic solution, while Russia’s Lavrov urged the government in Kiev consider devolving power to give Ukraine’s regions more autonomy
  • Iran has forced a foreign policy dilemma on the Obama administration by choosing as its next UN ambassador an official who belonged to the group that held 52 Americans hostage in Tehran for 444 days.
  • Sovereign yields higher. Asian equity markets ex-China rise. European equity markets mostly higher, U.S. stocks futures gain. WTI crude and copper lower, gold little changed

US event calendar:

  • 9:00am: ISM Milwaukee, March est. 51.00, (prior 48.59)
  • 9:45am: Chicago Purchasing Manager, March., est. 59.5 (prior 59.8)
  • 10:00am: Annual Wholesale Inventory and Sales Revisions
  • 10:30am: Dallas Fed Manufacturing Activity, March, est. 2.5 (prior 0.3)
  • 2:00pm: Fed releases QE schedule for April


Asian Headlines

JGBs settled marginally lower, with swaps curve bear-steepening, on the back higher Nikkei 225 index (+0.9%) and also ahead of tomorrow’s monthly 10y JGB auction, which will be the first in the new fiscal year. In terms of Chinese related commentary, the FT reported that China’s biggest banks more than doubled the level of bad loans they wrote off last year and removed CNY 59bln from their books, while analysts at Deutsche Bank cut their Chinese 2014 GDP growth estimate to 7.8% from 8.6% and cut 2015 GDP growth estimate to 8.0% from 8.2%.

EU & UK Headlines

Unwind of bull flattening trades was observed this morning, which saw Euribor curve bear steepen as market participants reacted to comments by ECB’s Weidmann who downplayed the need for the ECB to act, noting that the central bank should not overreact to a slowdown in inflation caused largely by cyclical factors. This view was further confirmed by the release of the latest EU CPI data, which despite coming in lower than the consensus estimate is expected to rebound next month on base effects. Of note, energy prices were the biggest and only negative factor pushing this months number lower. Elsewhere, IT/GE outperformed EU peers (trading at its tightest level since June 2011) on touted month-end related flows which are said to be particularly supportive on BTPs and OATs.

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

Barclays preliminary Sterling month-end extensions: (+0.01y) (12m avg. +0.07y)

US Headlines

Little in terms of US macroeconomic commentary, with the focus now on the latest Chicago PMI release due later today. Barclays preliminary US Tsys month-end extensions:(+0.07y) (12m avg. +0.08y)


Stocks in Europe failed to hold onto best levels of the session and have gradually closed the opening gap higher, initially buoyed by expectation of further alleviation of fears surrounding Russia/Ukraine following constructive talks by Kerry and Lavrov. Financials were among the best performing sectors in Europe, with Monte Paschi trading up over 10%, following reports that bank’s foundation is to sell stake to Fintech and BTG.


The release of weaker than expected EU inflation data failed to weigh on EUR, with the major pair recovering knee-jerk move lower after the chief hawk of the ECB downplayed the need for the ECB to act on what he described to be a slowdown in inflation caused by cyclical factors which should prove temporary. At the same time, USTs were dragged lower by Bunds amid an unwind of expectations of further easing by the ECB, which in turn benefited USD/JPY via interest rate differential flows.


Energy complex was little reactive to the reports of constructive talks between US Secretary of State Kerry and Russia's Lavrov, who agreed to work to ease Ukraine crisis, with reports today according to AFP that Russian troops are gradually withdrawing from the Ukrainian border. Furthermore, Germany's Economy and Energy Minister Gabriel has sais the EU should cut its Russian NatGas dependance, whilst Finance Minister Schaeuble said Germany could cope with a Russian NatGas and oil embargo.

In terms of precious metals, analysts at Credit Suisse has raised it average 2014 gold price forecast to USD 1,260/oz from USD 1,080/oz and its 2015 average to USD 1,100/oz from USD 990/oz.

* * *

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

As the new week begins, today also sees the end of the first quarter - a pretty fascinating one for markets. We'll be doing our usual performance review tomorrow. Ahead of this let's briefly review an important week ahead which sets up for an eventful end to Q1 and start to Q2.

Starting with Europe, ahead of the looming ECB meeting on Thursday, all eyes will be on the Euroarea CPI for the month of March (Monday). The core CPI print is expected to drop to 0.8% (from 1.0% last month) which would take us back to the Q4 2013 lows. Following this, the final PMIs (and the PMIs for the periphery) will be released tomorrow as Euroarea finance ministers meet in Athens to discuss bank supervision, amongst other topics. In terms of Thursday’s ECB meeting, an increasing number of participants expect the ECB to ease policy following the dovish comments that we saw from Weidmann and other ECB officials last week (we discuss Weidmann’s comments in further detail below). However this is not the expectation of DB’s Mark Wall and Gilles Moec. In their latest Focus Europe piece they write that they expect Draghi to press the “de facto loosening” argument, complemented by allusions to negative deposit rates and QE. Indeed, the FT’s Wolfgang Munchau wrote over the weekend that the ECB may wait until after European elections to roll out QE, and in the meantime pursue its strategy of “verbal intervention” which he describes as the central banker’s equivalent of a free lunch.

In the US, Janet Yellen will be speaking at an Interagency Development conference in Chicago today (around 3pm London) which will be her first public comments since the March FOMC. It’s unclear whether there will be Q&A. Lockhart and Bullard speak tomorrow. The highlight on the data docket is Friday’s payrolls where DB’s Joe Lavorgna is calling for a Top-of-the-Street +275k gain in the headline as hiring recovers from the winter-induced slump. The consensus is for a 200k gain in and a 0.1ppt fall in the unemployment rate to 6.6% (DB expects 6.5%). Ahead of payrolls, we have today’s Chicago PMI, Tuesday’s ISM, Wednesday’s ADP employment and Thursday’s February trade report and non-manufacturing ISM. The ADP and non-manufacturing ISM will likely prompt a number of revisions to estimates for Friday’s payrolls.

In emerging markets, China’s official PMI will be the most keenly observed data release (Tuesday). Consensus is for the index to edge down to 50.1 in March (vs 50.2 in Feb), though still significantly above the HSBC preliminary PMI of 48.1. While the first part of the week will be about the outcome of local elections, Turkey also releases its GDP (Mon), trade balance (Mon) and inflation (Thu). For Russia, we get the latest GDP data (Wed) and inflation data (Fri). The main event in LATAM will be Brazil's (Wed) Central Bank rate decision, where our EM team expects yet another 25bps hike due to still high inflation forecasts.

Before we review the weekend news flow, we’ll take a quick look at overnight markets. Asian equities, outside of China, are seeing a better tone perhaps buoyed by Friday’s constructive market tone and the more conciliatory tone expressed by US and Russian officials over the weekend (more below). It’s been a relatively quiet start to the week newsflow-wise. Korean equities (- 0.2%) are down slightly after news that the two Koreas had exchanged artillery fire near a disputed border. The Nikkei (+0.5%) opened up strongly but has given up most of those gains as we type. Japan’s February industrial production data showed that activity dropped 2.3% MoM, sharply below forecasts of 0.3% growth. Our economists attribute this to negative payback from January’s outsized gains and snowfall over two weekends in February.

Looking at the the weekend newsflow, there was plenty of focus on the geopolitical developments in EMEA most notably in Turkey and Russia. Starting with Turkey, PM Erdogan’s ruling party has declared victory in Sunday’s local elections that some had described as a virtual referendum on the Turkish government. With nearly all ballot boxes opened and vote counting largely completed, NTV television is reporting that Erdogan’s AKP party has won more than 45% of the national vote and is set to retain control over Istanbul. The capital Ankara is still too close to call. The result is higher than the 39% achieved at the last local elections in 2009. The main opposition CHP party garnered around 28% of the vote according to NTV but they cited some irregularities with the voting process. According to Bloomberg, there were at least six fatalities as a result of election-related violence. The initial reaction this morning, albeit in illiquid markets, has seen the lira trade 0.75% higher
against the USD. Turkish bonds and the lira have had a strong run in the last fortnight, so it will be interesting to see how much further this rally could go post these elections.

In Russia, news broke shortly after Friday’s US market close that Putin had called Obama to discuss a diplomatic solution to the Ukraine crisis. The weekend press debated whether this was a turning point in the Ukraine crisis – but the Washington Post noted that the official recollections of the Putin- Obama call from the White House and Kremlin were starkly different, suggesting that perhaps diplomatic differences remain large. US Secretary of State John Kerry met with Russia’s Foreign Minister Lavrov for four hours on Sunday which concluded with both sides agreeing that they would continue to hold “constructive” talks to de-escalate the crisis. The recent build-up of Russian troops at the Ukraine border appeared to be one of the major sticking points. All this comes as the economic fallout to Russia gradually increases. On Friday, Moody’s changed the outlook on the Russia sovereign’s Baa1 rating to “Review for Downgrade” citing geopolitical risks and an economic slowdown.

A week earlier, S&P had changed the rating outlook on Russia to negative. Also on Friday, Russia’s largest aluminium producer, Rusal, warned of a potential covenant breach affecting nearly $4bn in debt unless a waiver is obtained from creditors by the end of today. Though it’s true that HK-listed Rusal’s woes have come from weakness in aluminium prices and an indebted balance sheet, the threat of economic sanctions against Russia are probably not helping its cause either.

Much of the weekend press was dedicated to the debate about the ECB and Fed’s policy, amid more data showing that inflation remains below target across the EU and US. The Bundesbank’s Weidmann surprised markets with his seemingly QE-supportive comments last week, but his interview with Reuters over the weekend appeared to have a more hawkish tone. Weidmann said that the Eurozone is not in a deflationary cycle and the ECB should not overreact to a slowdown in inflation caused by temporary factors affecting food and energy prices. He said the Euroarea “is not in a self-enforcing downward spiral of price decreases, which is nominally the definition of deflation". With regards to the issue of financial stability, he said its “obvious that low rates are a risk” and that “eventually this might mean that a necessary structural change fails to take place”. The theme of financial stability was central to a speech that the Kansas City Fed’s Esther George gave on Friday.

George argued that rates have been “too low for too long”. Contrary to the recent talk of QE and negative deposit rates at the ECB, Reuters reported that Germany's finance ministry expects borrowing costs to rise next year as the ECB will hike interest rates in response to an economic recovery, citing an internal document seen by Der Spiegel magazine.

Across the Atlantic, the latest PCE deflator index, one of the Fed’s preferred inflation gauges, came in at only 0.9% YoY in February, which was the weakest reading since October. The WSJ’s Hilsenrath wrote that U.S. inflation has now run below the Fed’s target for the 22nd straight month in February, a development that could give some Fed officials pause as they debate whether to keep pulling back on bond purchases and when to start raising short-term interest rates. The WSJ says that the last time inflation ran below the Fed's target for as long as the current 22-month run was from 1997 to 1999.

Back in Europe, the ekathimerini said that Greece could return to the international bond markets as early as the end of April. A key factor that will determine the timing of the issue as well as its terms is the spread between the Greek bond yields and those of Portugal. The Greek government is targeting a spread to Portuguese bonds of around 200bp (vs circa 250bp at the moment). While the ekathimerini says that international markets may be ready to welcome Greece back, international investors “continue to underestimate political risk” which “has not diminished at all” according to the newspaper.

In Asia, there was an increasing amount of focus on the health of China’s banks following the FY13 earnings announcements from the major banks over the course of the weekend and last week. The five biggest Chinese banks, which account for more than half of all loans in the country, wrote off $9.5bn from their books in debts that could not be collected, according to 2013 results cited by the FT. That was up 127% from 2012, and the highest since the banks were rescued from insolvency, recapitalised and publicly listed over the past decade (FT).


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