Equity Levitation Stumbles After Second ECB Denial Of Corporate Bond Buying, Report Of 11 Stress Test Failures

A day after a Reuters headline blast proclaimed that, in a stunning turn of events, the ECB which has barely started buying covered bond (of countries like Germany today for example, because the record low yielding Bunds clearly need help from the ECB) will also buy corporate bonds, sending the stock market soaring the most in 2014, it has now backtracked for the second time, and following a report from the FT yesterday which denied the report, the second denial came straight from Reuters itself which hours ago said that the ECB "has no concrete plans to buy corporate bonds, but this could be a way to prevent the bank from paying too much for just covered bonds and asset backed securities, ECB governing council member Luc Coene told Belgian media."

"We still haven't had a serious discussion about the purchase of corporate bonds," Coene, who is governor of the Belgian central bank, told business dailies L'Echo and De Tijd. "If we limit ourselves to buying covered bonds and asset backed securities there is a risk that we would pay too high a price. We can prevent that by also buying corporate bonds," Coene added. "But there is no concrete proposal for that on the table."

And if and when the ECB ever begins buying corporate bonds (of which there is once again not enough to boost its balance sheet to the required size but more on that later), the ECB can just jawbone that in order to not overpay for bonds, corporate or otherwise, it will just begin buying equities, and so on until the ECB has "no choice" but to monetize the garbage in your trash so as not to overpay for your kitchen sink.

However, if the ultimate goal of yesterday's leak was to push the EUR lower (and stocks higher of course), then the reason why today's second rejection did little to rebound the Euro is because once again, just after Europe's open, Spanish Efe newswire reported that 11 banks from 6 European countries had failed the ECB stress test. Specifically, Efe said Erste, along with banks from Italy, Belgium, Cyprus, Portugal and Greece, had failed the ECB review based on preliminary data, but gave no details of the size of the capital holes at the banks.

The ECB, which likely once again leaked the news, said it could not comment on individual institutions or on speculation. "Any inferences drawn as to the final outcome of the exercise would be highly speculative until the results are final on 26 October," said a spokesman. What the ECB certainly did enjoy is that once again, with just one media leak, it had managed to bring down the EURUSD by 50 pips lower, pushing it under 1.27 yet again. We wonder how long until Europe discovers, just like Japan, that merely slamming your currency does little to boost exports. But at least there is a rising market to keep everyone happy so why not.

Finally, circling back to those German record low yields, earlier today Germany sold another €1.428 billion in 30 year paper at a record low yield of 1.77%, far below the 2.25% in the last such auction in May, however, this was also the 10th (!) uncovered, as in failed, German auction of the year with the Buba forced to retain a whopping 28% of the paper, compared to 19% at the last primary issuance.

Elsewhere, the BoE’s October minutes which showed a 7-2 split among MPC members with Weale and McCafferty maintaining their hawkish stance, despite speculation that circulated pre-release that McCafferty may have stepped down in his call to hike rates. The initially reaction was volatile as outside bets of a 8-1 split were unwound, however, the details revealed a decidedly more dovish outlook from the majority of members who noted some signs that UK economic was losing momentum and that the economic outlook had worsened. As such the short sterling curve has flattened aggressively. Prelim Barclays month end extension for US treasuries +0.08yrs

In summary, European equities initially opened higher this morning following a 3rd consecutive day of >1% gains in the S&P 500 for the first time in 3yrs, and with the Nikkei up some 2.6% overnight. However the positive sentiment proved short lived as weak corporate earnings out of BAT’s and Heineken weighed on consumer stables, ECB’s Coene said that there is no concrete proposal for bond buying, refuting claims to the contrary yesterday, and Spanish press reported that 11 banks may fail the ECB stress tests which are due to be released this Sunday (ECB has declined to comment).

Looking ahead attention turns to US CPI (Sep), DoE oil inventories, Boeing (BA) earnings, and the release of the Bank of Canada interest rate decision where all surveyed analysts are expecting rates to remain on hold at 1%

Bulletin headline summary from RanSquawk and Bloomberg

  • Reports circulate that 11 banks may have failed the ECB’s stress tests which are due to be released on Sunday
  • GBP underperforms in the FX market after dovish comments in the October BoE minutes
  • Treasuries gain before CPI report amid weakness in European stocks, decline in U.S. equity index futures as market looks to next week’s Fed meeting.
  • Fed isn’t likely to postpone end of QE or initiate more asset buying soon despite global risks and weakening inflation momentum, according to some strategists
  • ECB’s Luc Coene said while policy makers could embark on further stimulus after purchasing covered bonds for the past two days, there’s no specific plan to buy corporate bonds
  • Bank of England officials split for a third month on whether to increase the key interest rate as a majority saw increased risks from a slump in the euro-area economy
  • ECB bought Spanish covered bonds in the third day of its purchase program, according to a person familiar with the matter, who asked not to be identified because they’re not authorized to speak about it
  • Johnson & Johnson plans to have 250,000 doses of an experimental Ebola vaccine ready for use in clinical trials in May, adding to efforts to protect people from the virus that has killed thousands of people in West Africa
  • Iraqi Kurdish fighters are set to reinforce the defense of Kobani, the Syrian town besieged by Islamic State, after Turkey agreed to let them transit its territory
  • China’s media is ratcheting up the rhetoric against Hong Kong’s pro-democracy movement, saying protesters risk becoming foreign puppets
  • Russia and Ukraine will seek a temporary deal next week to resolve a natural gas pricing dispute after failing to agree on future payments in talks brokered by the EU
  • Sovereign yields mostly lower, Greek 10Y -46bps to 7.25%. Asian stocks gain, European stocks mixed, U.S. equity-index futures decline. Brent crude and copper gain, gold falls

US Event Calendar

  • 7:00am: MBA Mortgage Applications, Oct. 17 (prior 5.6%)
  • 8:30am: CPI m/m, Sept., est. 0.0% (prior -0.2%)
    • CPI y/y, Sept., est. 1.6% (prior 1.7%)
    • CPI Index NSA, Sept., est. 238.030 (prior 237.852)
    • CPI Ex-Food and Energy m/m, Sept., est. 0.1% (prior 0.0%)
    • CPI Ex-Food and Energy y/y, Sept., est. 1.7% (prior 1.7%)
    • CPI Core Index SA, Sept., est. 238.625 (prior 238.345)

Central Banks

  • 10:00am: Bank of Canada seen maintaining benchmark interest rate of 1%
  • 11:15am: Bank of Canada’s Poloz and Wilkins hold news conference in Ottawa
  • 5:00pm: Reserve Bank of Australia’s Stevens speaks in Sydney


GBP is the main under performer in the FX market weighed by a dovish interpretation of the October BoE minutes which although showed a consistent 7-2 split, saw the majority of MPC members continue to fret over the fragility of the economic environment. Meanwhile, EUR has also weakened amid reports that 11 banks may well have failed ECB’s stress tests which are due to be unveiled this Sunday. A combination of the above has prompted a slight to quality into the USD, with the DXY seen up 0.17%.

According to government sources, the PBOC are likely to hold its line against an interest rate cut even as growth slows to a quarter-century trough, as the politics of reform influence the conduct of monetary policy. (RTRS)


WTI crude futures remain flat into the US session as participants await the release of the DoE oil inventory data later today. The headline crude number is expected to show a build of 3mln compared to last week’s build of 8.923mln. To recap, yesterday’s headline API number showed a lower than previous build (1200k vs. Prev. 10200k).

Asian Market Wrap

Equity benchmarks are feeding off the positive sentiment with the Japanese, Hong Kong and Korean gauges all trading notably stronger – as we type the Nikkei is up +1.7% whilst the Hang Seng is trading +1.3% higher. Chinese equities are trading modestly firmer following the GDP print yesterday whilst elsewhere, in a boost to the Japanese manufacturing sector the nation’s exports rose at a greater than expected 6.9% YoY, providing a much needed vote of confidence to the central bank. Meanwhile in Australia the core CPI print was a touch softer than market expectations at 0.4% QoQ which we deem as unlikely to shift the RBA’s stance on monetary policy in the near term.

Europe Market Wrap

European shares little changed, having risen from earlier lows, with the personal & household and basic resources sectors underperforming and financial services, insurance outperforming. Companies including ABB, Heineken, Husqvarna, BATS, Nordea and Iberdrola released results. The U.K. and Spanish markets are the worst-performing larger bourses, the Swiss the best. The euro is weaker against the dollar. Greek 10yr bond yields fall; Portuguese yields decline. Commodities gain, with silver, corn  underperforming and zinc outperforming. U.S. mortgage applications, CPI due later.

  • S&P 500 futures down 0.1% to 1933.1
  • Stoxx 600 down 0% to 323.6
  • US 10Yr yield down 3bps to 2.19%
  • German 10Yr yield down 2bps to 0.85%
  • MSCI Asia Pacific up 1.5% to 138.1
  • Gold spot down 0.2% to $1245.9/oz

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DB's Jim Reid concludes the overnight events:

So a rally that started with Bullard's about turn on Thursday, ignited with some style yesterday after a Reuters story broke that the ECB was considering buying corporate bonds. Even though the FT subsequently cited an ECB source downplaying this possibility, the market heard what it wanted to hear and risk had a tremendous day globally.

The original story reported that “The European Central Bank is considering buying corporate bonds on the secondary market and may decide on the matter as soon as December with a view to begin purchases early next year.” Reuters claimed the source of this news as, “several sources familiar with the situation.” However the ECB announced that, “The Governing Council has taken no such decision.," and there was an FT report later in the day stating that the ECB has not put corporate bond buying on the agenda for its December meeting.

However the market is left thinking that there's no smoke without fire and in this morning's EMR we wanted to lay out some numbers behind the universe they could possibly look to buy if they went down this route. According to ECB data there are around €1.4tr of eligible corporate bonds to use for collateral for its repo operations – whose main requirement is that assets be Euro currency. However this number is based on their repo operation guidelines and to put things in a wider and more detailed perspective we've run our own numbers and have spliced and diced them a few different ways. Looking at the iBoxx EUR, GBP and USD IG indices (which cover a universe with the type of more liquid corporate bonds the ECB might be in the market for) the current total market value of the bonds in these three indices is around €5.4tr, of which around €1.5tr is Euro currency. If instead we look at those bonds issued by euro area firms across currencies then this number falls to €1.2tr. There remains a lot of uncertainty over whether the ECB would be able to buy financial debt, so if we just look at euro denominated, non-financial debt there is around €840bn available. Finally given that the ECB’s current ABS and covered bond programs only cover euro area, EUR denominated debt, if focus on this we end up with a total eligible non-financial iBoxx market of about €540bn worth of bonds, although we’d stress that these are rough numbers and we're making a lot of assumptions around what the ECB would or wouldn’t be willing to purchase. The key point here is that if the ECB went down this route and were too restrictive they would quickly limit the universe they could buy into. This could cause serious distortions. Liquidity is not great in credit at the moment and this wouldn't help. In fact it could create a large squeeze.

Interestingly in the sell-off of the last few months in various global risk assets Euro IG non-financials have been very stable and resilient with As and BBBs only a few bps off their cycle spread tights even with HY trading much wider then their cycle tights (single-Bs well over 200bps wider). So if Euro IG non-financial credit can't sell off with all that's gone on in recent weeks then surely the hint of this story is going to continue to keep them well bid. This should eventually help HY credit on a relative value basis and also due to the possibility that some investors might switch out of the performing IG market and look for more yield.

Overall we don't want to over analyse one Reuters story, especially one that the ECB were quick to down play. However it reminds investors that the ECB likely needs to act somewhere relatively soon and corporate bonds might be an easier political move than Government bonds. Given their desire to increase the balance sheet by close to a Trillion Euros every bit helps but we still can't help thinking that unless they want to severely distort ABS, Covered and Corporate bond markets, to get to this number within a sensible time frame they will still eventually need to buy government debt.

Markets certainly reacted positively to the mere speculation of the plan. In European equities, the Stoxx 600 ended the day up +2%, whilst in credit iTraxx Main and Crossover tightened by -5bps and -24bps respectively. Over in the US, the S&P also closed the day up +2% (the best day for a year) whilst CDX IG and HY tightened –3bps and -12bps. EURUSD ended the day -0.7% with possible further ECB balance sheet expansion clearly in mind. In bond markets the big winner was peripheral debt as Italian, Spanish, Portuguese and Greek 10Y yields fell –8bps, -6bps, -1bps and -35bps respectively.

While on Europe the FT reports that the EC's will today tell five Eurozone countries that their budget plans risk breaching EU rules. Italy and France are the headline acts here but Austria, Slovenia and Malta seem to be also being targeted.

In terms of markets overnight, equity benchmarks are feeding off the positive sentiment with the Japanese, Hong Kong and Korean gauges all trading notably stronger – as we type the Nikkei is up +1.7% whilst the Hang Seng is trading +1.3% higher. Chinese equities are trading modestly firmer following the GDP print yesterday whilst elsewhere, in a boost to the Japanese manufacturing sector the nation’s exports rose at a greater than expected 6.9% YoY, providing a much needed vote of confidence to the central bank. Meanwhile in Australia the core CPI print was a touch softer than market expectations at 0.4% QoQ which we deem as unlikely to shift the RBA’s stance on monetary policy in the near term.

Back to yesterday, in other news UK public sector borrowing in September came in slightly above expectation at 11.1bn whilst over in the US, existing home sales for September came in ahead of expectation at +2.4% MoM (vs +1% expected). Also DB’s new China economics team published their latest views on the Chinese economic outlook. The team have cut DB's GDP forecast for China to 7.3% for 2014 and 7% for 2015 citing, “the dominant driver for a growth slowdown is property investment. Property sales remained subdued in September. In past housing cycles, the turning point of property sales led that of property investment by seven months. Therefore, we expect property investment to slow further, at least into mid-2015.” In terms of potential PBOC action, the team also expect the PBOC to cut interest rates by 50bps in 2015. Whilst they note that this view is not consensus, they think the PBOC will act as they, “see growth dropping to 6.7% by Q2 2015 and we believe hard-landing risks may intensify in H2 2015 if the government does not loosen monetary policy significantly. Moreover, inflation has been subdued, which leaves room for policy easing.”

Looking to the day ahead, in Europe we will get the latest BoE minutes which we expect to show little change in the number of members voting for higher rates. However the big read of the day is likely to be US September CPI which is expected in at +0% MoM. This will maybe help shape the Fed so it’s an important release. The market will likely also keep a keen eye on earnings over the day with notable reporters in the US including Boeing, General Motors and