After the worst week for stocks in years, and following a significantly oversold condition, it will hardly come as a surprise that the mean reversion algos (if only to the upside), as well as the markets themselves (derivative trading on the NYSE Euronext decided to break early this morning just to give some more comfort that excessive selling would not be tolerated) are doing all they can to ramp equities around the globe, and futures in the US as high as possible on as little as possible volume. And sure enough, having traded with a modestly bullish bias overnight and rising back over 2000, the E-Mini has seen the now traditional low volume spike in the last few minutes, pushing it up over 15 points with the expectation being that the generic algo ramp in USDJPY ahead of the US open should allow futures to begin today's regular session solidly in the green, even if it is unclear if the modest rebound in the dollar and crude will sustain, or - like on every day in the past week - roll over quickly after the open. Also, we hope someone at Liberty 33 tells the 10Y that futures are soaring: at 2.13% the 10Y is pricing in nothing but bad economic news as far as the eye can see.
Speaking on oil, Brent gained more than $1, after earlier dropping to lowest since July 13, 2009. There was some bullish sentiment when Libya declared force majeure at oil ports, although that will hardly last once algos process that the combined capacity that is offline is a paltry 580k b/d capacity. WTI trades ~$58.50, climbs more $2 also off 5-yr low, on the same "catalyst." Expect both fading as the realization that OPEC isn't kidding about $40 barrel oil filters through.
Finally, as we showed last night, this is what, via Nanex, a direct intervention to push crude higher - because central banks finally realized that plunging oil may be "unambiguously good" for the economy but is increasingly bad for markets - looks like: presenting the well-known "flash smash", coming to every central-bank traded asset class near you.
Otherwise, as Ransquawk summarizes, in a relatively subdued morning, European equities start the week in positive territory after being buoyed by the energy sector following the slight bounce back in energy prices after falling below July 2009 levels at USD 58.32. This move comes despite earlier comments from UAE Energy Minister stating that ‘OPEC will stand by its decision not to cut crude oil even if oil prices fall as low as USD 40/bbl and will wait three months before an emergency meeting.’ In fixed income, the lack of pertinent macro news has failed to give Bunds much in the way of sustained direction, although they trade in negative territory with volumes exceedingly thin. Elsewhere, the Greek spread has seen a modest bout of tightening in a minor pullback of last week’s substantial widening following news that, according to weekend polls, the lead of the Greece opposition Syriza party over the ruling coalition has shrunk to 2.8-3.6% from about 4% a month ago.
US Senate passed the USD 1.1trl spending bill on Saturday night, sending it to President Obama for his signature. (BBG) Russia will take counter measures if the US imposes new sanctions over the Ukraine crisis, according to Russian Deputy Foreign Minister Ryabkov. (Interfax)
Asian equities started the week on the back-foot following Friday’s sharp sell-off on Wall Street, which saw the S&P 500 and DJIA post its biggest weekly losses since May 2012 and Sep 2011 respectively. Nikkei 225 (-1.57%) was weighed on by JPY strength benefiting from flight to safety, with the index earlier touching its lowest level since Nov. 17. Shanghai Comp (+0.52%) remains firmly in the red, while Hang Seng (-0.95%) is on course for a 2-month low, weighed on by weakness in energy stocks.
In FX markets, USD/JPY swung over 100 pips, initially opening above 119.00, following reports of a landslide victory for Japan PM Abe in the by-elections, before tumbling to 117.78 led by carry-trade unwinds and semi-official price keeping operations. Elsewhere, AUD saw a minor spell of weakness following reports of an ongoing hostage situation in a café 10 meters away from the RBA. This situation is still ongoing and we will continue to update listeners on the situation.
In precious metals, gold trades at its lowest levels since Tuesday 8th December 2014 as prices pulled back from last week’s gains which saw the precious metal record it best week in 2 months, as focus now shifts to this week’s FOMC meeting. Overnight, copper prices held on to its gains despite ongoing concerns of a slowing economy in China, amid reports mining giants BHP Billiton and Rio Tinto are said to be amassing vast copper holdings in a push to dominate the copper market, while Dalian iron ore futures also traded marginally higher for its 4th consecutive gain. For details of the moves seen in oil markets, please visit the ‘equities/fixed income section’.
Bulletin headline summary
- European equities trade in positive territory following a modest pullback in energy prices in what has otherwise been a quiet session.
- Japanese PM wins the national elections in a landslide victory, securing 2/3 of the seats in the Lower House.
- Treasuries decline amid gains in European stocks, crude oil; market focus on Fed meeting, with rate decision and Yellen presser due Wednesday.
- FOMC seen as likely to drop “considerable time” from statement, based on published research
- OPEC will stand by its decision not to cut output even if oil prices fall as low as $40/bbl, will wait at least three months before considering an emergency meeting, the United Arab Emirates’ energy minister said
- Japan’s Abe claimed a mandate for his economic program after his gamble on early elections paid off with a sweeping victory that forced the leader of the opposition to resign
- ECB will begin sovereign QE next year, according to more than 90% of respondents in Bloomberg’s monthly survey, up from 57% last month; 55% expect announcement will come in 1Q
- The “prospect of missing our target on price stability in the longer term” in connection with low growth would be a condition that could trigger QE, ECB Governing Council member Ewald Nowotny told reporters in Vienna
- France’s credit rating was cut to AA by Fitch Ratings, which said the downgrade reflected the absence of a material improvement in the nation’s public debt dynamics and slippage in the budget deficit targets
- Hours after five hostages fled a cafe in Sydney, police won’t say how many are left in the building or disclose the motives of the gunman, who has forced his captives to display a black flag with Arabic lettering sometimes used by Islamic militants
- If Greece’s parliament elects a president this month, the Troika can return to Athens Jan. 10, Finance Minister Gikas Hardouvelis says in interview in Naftemporiki newspaper
- Sovereign yields mixed. Nikkei falls 1.6% as Asian stocks ex-China decline. European stocks, U.S. equity-index futures gain. Brent crude +1.1%, copper gains, gold falls
- Looking ahead, US Empire Manufacturing (1330GMT/0730CST) and Industrial Production (1415GMT/0815CST).
US Event Calendar
- 8:30am: Empire Manufacturing, Dec., est. 12 (prior 10.16)
- 9:15am: Industrial Production m/m, Nov., est. 0.7% (prior -0.1%)
- Capacity Utilization, Nov., est. 79.3% (prior 78.9%)
- Manufacturing (SIC) Production, Nov., est. 0.6% (prior 0.2%)
- 10:00am: NAHB Housing Market Index, Dec., est. 59 (prior 58)
- 4:00pm: Net Long-term TIC Flows, Oct. (prior $164.3b); Total Net TIC Flows, Oct. (prior -$55.6b)
DB's Jim Reid completes the weekend event summary
We open this morning with news from Japan that Prime Minister Abe has, as largely expected, retained control following the parliamentary election results. The liberal democratic party won 291 out of the 475 available seats in the lower house of parliament which matched similar levels two years ago and suggests Abe should come through the September 2015 elections fairly comfortably. The Komeito party won a further 35 seats meaning the coalition party has the two-thirds majority necessary to pass legislation without recourse to the upper house. Early reports of the turnout numbers however, appear to be disappointing with the FT reporting early indications of 52.3% which would be well below the previous low of 59.3% in 2012. Looking at market reaction, both the Topix (-1.30%) and Nikkei (-1.44%) are softer this morning whilst the JPY is around 0.1% weaker against the Dollar at 118.60. The BoJ’s Tankan survey was relatively uneventful, although suggested deterioration in the outlook for the manufacturing industry. Elsewhere all major bourses are weaker in Asia this morning with the Hang Seng (-1.10%), CSI 300 (-0.09%) and Kospi (-0.29%) all lower– reflecting the weaker sentiment in the US on Friday. Oil has bounced reasonably sharply off Friday's lows this morning (more below) although the siege in Sydney CBD is also being featured as one of the top stories overnight. The ASX is also 0.60% lower this morning although the Aussie Dollar is off the earlier lows currently at around 82.4 versus the Dollar as we type.
Staying on markets, oil again dominated headlines on Friday after further falls in both WTI (-2.14%) and Brent (-1.79%) to $56.51/bbl and $60.74/bbl respectively. Sentiment wasn’t helped following the updated IEA forecasts for demand with the agency currently expecting global demand to grow by around 900k barrels a day next year, down from the initial 1.3m barrels previously. Risk assets took a sharp leg lower in US with the S&P 500 ending -1.62% with Energy again a notable sector laggard (-2.14%). Credit spreads were wider as well with the HY Energy sector again in focus. US HY energy names continued to slide as cash spreads widened around 39bps on Friday and 130bps over the week to mark around 260bps of widening since the OPEC meeting. US HY energy spreads have now nearly doubled to current levels of 819bps since early September when Brent was trading north of $100/bbl. The CDX IG closed 3bps wider whilst IG energy names were around 11bp wider on Friday. The pressure is clearly mounting on corporates as we’ve mentioned with cutbacks in forecasted capex in recent weeks and this has been further evident over the weekend when US oil services company Baker Hughes confirmed that idled US oil rigs increased by 29 last week – making it the largest one week increase in idled rigs since December 2012. Few Canadian energy companies also announced capex cut backs late last week.
Treasuries were the ultimate beneficiary amid a risk-off tone in broader markets. The 10y yield fell 8bps lower to 2.082%, a level that was last seen in June 2012. Data took a back seat on Friday in terms of driving the macro moves although the first reading of the December University of Michigan Confidence print was encouraging with the 93.8 level well ahead of market consensus (89.5) – the highest level since January 2007. Lower energy prices weighed on the PPI reading, with the headline print declining 0.2% mom for November although the core print was largely stable with the annualized rate unchanged at +1.8% yoy.
The bounce in Oil is one of the more notable moves overnight. The commodity appears to have rebounded around 0.7-1.0% off Friday's close this morning to retrace some of Friday’s losses. Brent and WTI are currently $62.53/bbl and $58.23/bbl as we head to print. The market appears to have shrugged off a bearish report over the weekend from the UAE energy minister who was quoted on Bloomberg saying that OPEC will continue to keep output at current levels, even if prices fell as low as $40 a barrel. The minister also suggested that the cartel would wait for at least three months to consider another emergency meeting. Equity markets in the Middle East were lower over the weekend as the Qatar Stock Index declined nearly 6% to close nearly 23% off YTD highs. Likewise Saudi Arabia and Kuwait bourses have tumbled around 27% and 20% off their YTD highs. The correction has also been fairly material for the oil-sensitive Dubai (DFM) which is now down around 1.5% for the year after having trading some 59% higher at one point before summer.
Back to our outlook, one of our concerns in the first few months of the year is that there are indications that the Fed want to be more hawkish regardless of any market volatility that we're seeing at the moment and any such actions might cause. When push comes to shove we don't think they'll find it very easy to raise rates in 2015 but they certainly might give markets a few frights first in signaling it. We'll know more about this on Wednesday as the all important FOMC meeting draws to a conclusion. Will Mrs Yellen drop "considerable time"? Will they base their thoughts on the +321k payroll print 10 days ago or the fact that the S&P 500 had its worst week in more than two years last week with the Oil sector causing problems in equities and worse problems in credit markets? Also 5yr5yr forward breakeven inflation has fallen 20bps since October and grabbed a lot of attention last week. So a lot to throw in the mix. If the Fed are hawkish this week then we know they are serious about normalising rates, even in the face of challenging market conditions and worries about low inflation. If dovish then we know they are only going to raise rates early if all the stars are aligned. So an important meeting for understanding how they'll behave next year.
On the other side of the Atlantic, Friday was another testing day for Greece. Indeed Greek assets continue to slide with the pressure focused at the front end of the yield curve as 3y yields closed 40bps wider to just over 11%. Greek equities also weakened, the ASE closing 0.42% lower. This all comes before the Greek presidential election this Wednesday with the somewhat expected second and third rounds due the following week so we could see some more volatility in the next couple of days leading up the event. Just on this, the latest opinion polls on the weekend showed something of a modest narrowing in support for the main opposition SYRIZA party with the Kapa poll showing a 0.3% decrease in SYRIZA support to 25.5% and Alco poll showing support dropped to 27.6% from 28% previously (Bloomberg news). Otherwise stocks in Europe took a leg lower on Friday as the Stoxx 600 closed -2.58% with similar weakness in energy names whilst Xover weakened some 20bps wider. Bunds extended their recent rally with the 10yr tightening by around 5bps to close at another new low of 0.624%.
Before we take a look at this week’s calendar, Nobel laureate Paul Krugman told the media over the weekend that he thinks a 2015 Fed hike is increasingly unlikely given weak global growth and the absence of inflation.
Looking at the week ahead and away from the FOMC meeting we are off to a quiet start in Europe this morning with no significant releases although we do have the NY Fed Empire survey (Dec), industrial production (Nov) and the latest NAHB housing market index to look forward to. In terms of tomorrow we have the latest flash HSBC manufacturing PMI from China which will likely be a source of headlines when we print the EMR tomorrow morning. Tuesday also sees flash services and manufacturing PMI’s for the Euro-area, France and Germany, the German ZEW survey, UK inflation stats, and housing starts/building permits from the US. On Wednesday we have the latest BoE minutes from the UK, final HICP prints for the euro area and CPI updates from the US although Greece will be one of the key macro focus for markets. The first of three possible parliamentary votes to elect Greece's new President will take place this Wednesday 7pm local time (Kathimerini). On Thursday China will release the latest property price performance for November whilst German IFO, the US weekly jobless claims, and the Philly Fed survey are the other notable releases. Friday morning's BoJ statement will be of some interest on top of the sentiment/confidence readings in Germany and France.