Futures Soar On Swiss NIRP Stunner, "Considerably Patient" Fed

After drifting unchanged for much of the overnight session, US futures exploded higher shortly after the previously noted SNB's NIRP announcement, which took place at 2 am eastern, which made it explicit that yet another banks will herd the bouncing dead cats right into new all time stock market highs, and following the European open, were carried even higher as the global "risk-on" momentum ignition algos woke up, spiking all recently depressed assets higher, including energy as Brent rose almost 3% despite Saudi Arabia’s oil minister Ali al-Naimi once again saying "it is difficult if not impossible" for OPEC and his kingdom to reduce output.

Paradoxically, the Saudi also agreed with Janet Yellen in stating that the oil price drop was "temporary" suggesting that the oil price shock is not supply-driven, but is merely a function of the financialization of oil as collateral and an asset. And now that the SNB has made it clear that it too will urge depositors to put their money into risk assets, preferably stocks but crude also works, crude is once again becoming disconnected from recent supply (and demand) concerns and rising higher, in the process taking energy equities (and junk bonds) higher with it.

Elsewhere overnight, Chinese stocks took a breather last night (the SHCOMP was basically unchanged) from the breakneck surge in recent weeks that has seen the Shanghai Composite rise from under 2500 to over 3000 in one month on hopes of even more imminent central bank intervention. Ironically this happened even as the central bank offered short-term loans to commercial lenders as the benchmark money-market rate jumped the most in 11 months (yes, another central bank intervention).

European equities followed suit from their US counterparts and trade firmly in the green in the aftermath of yesterday’s FOMC release, whereby the Fed decided not to fully remove the ‘considerable time pledge’. Despite some hawkish undertones that left the door open to a potential rate hike as early as 2015, equity markets trade in positive territory in a pullback of this week’s heavy losses, with Fed rate lift-off still not immediately on the cards. The strength in equities saw flows out of USTs late in the US session yesterday, although have since pulled off their worst levels while Bunds ebbed lower after the German IFO report. Albeit in-line with analyst exp. release, it failed to deliver the dreary outlook that perhaps the market was positioned for. Further upside for European equities has stemmed from the surprise decision by the SNB to cut their key interest rate, with the SNB head Jordan attributing the move to act as a deterrent to CHF inflows. Additionally, positive sentiment from a stock perspective has also been enhanced by a seemingly stabilization of Russian asset classes and a bounce in oil prices.

Whatever the reason behind the latest epic, V-shaped move in stocks, US equity futures are now some 70 points higher from where they were just 48 hours ago, having recouped a week's worth of losses in 2 days, and are on route to recovering virtually all losses incurred since the first week of December. And while one can debate if the energy tumble is supply or demand driven, one thing is certain: markets are about to do what they do best - completely ignore yet another warning signal that not all is well. And why not: after all central banks will always be there to nudge and bail anyone out.

And while macro fundamentals remain completely irrelevant in a world where "markets" are purely the plaything of central banks, looking ahead algos will respond to flashing red headlines from US weekly jobs data, services PMI, Philadelphia Fed business outlook and EIA natural gas storage change


Bulletin headline Summary

  • European equities follow suit from the US and enter the North American open in the green.
  • SNB surprises markets by introducing negative rates in an unscheduled release.
  • Looking ahead, attention turns towards the release of the US weekly jobs data, services PMI, Philadelphia Fed business outlook and EIA natural gas storage change
  • Treasuries decline amid global surge in stocks and other risk assets after Fed yesterday pledged patience on raising rates; volumes may decline as Christmas holiday approaches.
  • Putin said Russia shouldn’t waste currency reserves protecting the ruble as the country braces for a recession brought on by the collapse of the oil price and sanctions over the Ukraine conflict
  • Swiss National Bank imposed the country’s first negative deposit rate since the 1970s as the Russian financial crisis and the threat of further euro-zone stimulus heaped pressure on the franc
  • As Draghi signals he’ll override German-led concerns on government bond purchases if needed, the ECB is under attack in Germany amid concern that central bank is taking risks that the Bundesbank would never tolerate
  • China’s central bank offered short-term loans to commercial lenders as the benchmark money-market rate jumped the most in 11 months
  • China new-home prices fell y/y by the most in 2014 last month in Beijing, Shanghai, Guangzhou and Shenzhen, according to govt data released today.
  • China is aiming to purge most foreign technology from banks, the military, state-owned enterprises and key government agencies by 2020, stepping up efforts to shift to Chinese suppliers, according to people familiar with the effort
  • China is becoming more willing to let the yuan depreciate modestly and add flexibility to the currency’s trading, WSJ reports, citing unidentified Chinese officials and others familiar with China’s policy making
  • German business confidence rose for a second month, with the Ifo institute’s index advancing to 105.5 in December from 104.7 in November, when it rose for the first time in seven months
  • U.K. retail sales rose more than economists forecast in November as Black Friday boosted sales of electrical appliances and household goods
  • Obese workers may claim discrimination in the work place, the European Union’s highest court said in a case that will pave the way for severely fat people to be protected as disabled
  • Sony Pictures’ decision to let Seth Rogen make “The Interview,” a comedy about a plot to kill a head of state will potentially cost the studio hundreds of millions of dollars after a devastating cyber- attack linked to North Korea; Sony canceled to film’s release yesterday
  • Sovereign yields mixed. Asian, European stocks, U.S. equity-index futures surge. Brent crude, gold and copper gain

US Event Calendar

  • 8:30am: Initial Jobless Claims, Dec. 13, est. 295k (prior 294k)
    • Continuing Claims, Dec. 6, est. 2.435m (prior 2.514m)
  • 9:45am: Markit US Composite PMI, Dec. preliminary (prior 56.1)
    • Markit US Services PMI, Dec. preliminary, est. 56.2 (prior 56.2)
  • 10:00am: Philadelphia Fed Business Outlook, Dec., est. 26 (prior 40.8)
  • 10:00am: Leading Index, Nov., est. 0.5% (prior 0.9%)


In FX markets, USD strength has dictated the state of play in the wake of the FOMC decision, with the USD-index pulling away from its recent lows and now remains in favour heading into the year-end. This initially saw USD out-muscle its major counterparts, although has since comes off its best levels. CHF has since pared some off its post-SNB weakness, with participants booking profits on earlier gains in EUR/CHF, while GBP benefited in a fast-money move from a particularly strong UK retail sales report (ex-auto M/M 1.7% vs Exp. 0.3%). Elsewhere, NZD has also modestly recovered from overnight losses stemming from a largely mixed NZ GDP report.


WTI and Brent crude futures initially opened lower in a continuation of yesterday’s losses, although have since spiked higher amid no fundamental news, although from a technical perspective WTI and Brent broke back above USD 57/bbl and USD 62/bbl respectively. In metals markets, spot gold and silver remain at their post FOMC levels, while Copper prices traded relatively flat overnight to hold on to yesterday’s gains following mixed signals from the region after the China Beige Book suggested mild improvement in sales, profit and unemployment for H2, while the latest China property price data showed China New Home Prices declined at a faster pace. Additionally, this helped steel rebar bounce of 2-week lows.

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DB's Jim Reid concludes the recap as is customary

A big part of our outlook is that central banks still hold all the power in financial markets as they have done for several years. It was the Fed's turn last night to demonstrate this as the S&P 500 (+2.04%) had its biggest day of the year. Net-net they probably gave something for both the doves and the hawks and a lot now seems to depend on whether inflation stays low or gravitates back towards 2%. If it’s the former then rates are unlikely to rise in 2015 and if it’s the latter then the Fed will want to raise rates. Overall the statement and press conference reflected a Fed confident they can start normalising soon but as ever they make this data dependant. If you'd have told me yesterday morning that the S&P was going to have its best day of the year I would have thought the meeting would have been more dovish than it actually was though.

Running through the statement itself, much of the focus was on the ‘considerable time’ language which, whilst not removed, was replaced with ‘patience’ in regards to timing of the first rate hike. The committee did however make an effort to note that they see this as consistent with the previous statement – perhaps as a way to try to minimize the market impact. Yellen followed this up in the Q&A shortly after by saying that ‘the timing of the initial rise in the fed funds target as well as the path for target thereafter are contingent on economic conditions’. More pressing was perhaps the news that ‘it is unlikely to begin the normalization process for at least the next couple meetings’ which in effect rules out the January-March period but potentially brings April into play should we see encouraging signs from macro data through early next year. Dot points for the Fed Funds rate were lowered. The Median forecast now sits at 1.125% for 2015 (down from 1.375%) rising to 2.5% in 2016, down from 2.875% in the previous forecast.

On inflation the message was generally mixed and difficult to argue either way for the doves or the hawks. The statement acknowledged that inflation continued to run below the long-run objective but did make a point to highlight the impact of lower energy prices on the headline. It was noted that market-based measures of inflation have declined further but survey measures on long-term expectations have remained unchanged. Hawks will argue for Yellen’s comments in her press conference that declines in oil prices will only have a transitory impact on inflation and that the committee expects inflation to still move gradually back towards 2% by 2016. Doves on the other hand however will look at the downgraded forecasts to the core reading to 1.2%-1.3% this year (from 1.5-1.7%) and 1-1.6% in 2015 (from 1.6%-1.9%).

There were some modestly more positive comments with regards to the economic picture. Specifically the statement mentioned that ‘economic activity is expanding at a moderate pace’ whilst also noting that the recent drop in oil prices is a net plus for the economy. GDP expectations have been kept relatively unchanged for 2015 and 2016 although the forecast for this year was narrowed to 2.3%-2.4% and revised up from the 2.0%-2.2% September projection. Labour market chatter was encouraging. The FOMC noted that labour market conditions had ‘improved further’ and that a range of indicators ‘suggests that underutilization of labour resources continues to diminish’. The unemployment rate forecast was notched modestly lower for 2015 to 5.2%-5.3% (from 5.4%-5.6%).

Both Fisher and Plosser joined Kocherlakota as dissenters. Plosser stated that the statement should not focus on the importance of time with regards to rate guidance whilst Fisher noted that improvement to the US economy has been quicker than expected and ahead of committee expectations. Kocherlakota – the lone dissenter in the October statement – noted ongoing low inflation and falling expectations as creating downside risks to the credibility of the 2% target.

It’s hard to say how much influence yesterday’s CPI print had on the statement. A decline in the headline to -0.3% mom (and below consensus of -0.1% mom) was largely as a result of a 3.8% drop in energy costs which lowered the annualized rate to +1.3% yoy from +1.7% yoy. The core reading on the other hand came in as expected at +0.1% mom. Energy prices are projected to fall further in December so downward surprises to the headline continue to be a risk.

Coming back to markets, as mentioned the S&P 500 closed firmer although bounced around post FOMC statement and then again during Yellen’s Q&A. The latter helped the index rally +1.2% into the close. Oil markets closed stronger with both WTI (+0.97%) and Brent (+1.95) firming to $56.47/bbl and $61.18/bbl respectively. Both grades traded some 5% higher intraday post-FOMC only to then pare those gains into the close. The flash-rally was enough to support energy stocks however, with the sector finishing +4.22%. Credit markets also firmed. CDX IG closed 7bps tighter whilst US HY energy names rallied 35bps in cash spread terms – the first day since December 5th that they have closed firmer. Treasuries bounced around with the changes in sentiment. Benchmark 10y yields closed 7.7bps higher at 2.136%. The Dollar closed firmer, the DXY ending +1.14%.

Before all this in Europe the Stoxx 600 firmed into the close to end +0.14% - driven by similar gains to energy names (+3.13%). 10y German yields closed relatively unchanged at 0.592% as the final CPI reading for the euro-area came in unchanged with the headline +0.3% yoy and the core at +0.7% yoy. Peripheral yields closed anywhere from 3-7bps tighter, supported by comments from the ECB’s Coeure who was quoted as saying that ‘there is a large consensus in the governing council to do more, and we are discussing now on what tools to use’. Just wrapping up the data yesterday, UK unemployment remained steady at 6.0% although the claimant count ticked down a notch to 2.7%.

Much of yesterday’s focus however was on Greece and Russia. Starting on the former, the results of the presidential election went largely as expected with Dimas – nominated by PM Samaras– gaining 160 votes (which included 5 from independent deputies) and well short of the 200 needed in the first two rounds. The result comes at the lower end of our resident expert George Saravelos’s range and is therefore something of a disappointment. The result means attention shifts to the second round on the 23rd and then a likely third round on the 29th when the number of votes needed drops to 180. Interestingly Greek assets closed firmer. The ASE finished +3.33% and Greek yields rallied across the curve – the 10y in particular tightening 29.7bps to 8.765%. Moving to Russia, the volatile swings in the ruble continue after a +9.31% rally yesterday to close at 61.59 versus the Dollar – bouncing off Tuesday’s all time lows. The move came about following an announcement from the Bank of Russia that they intend to support the banking sector through liquidity injections and looser capital requirements. The Dollar RTS index closed +14.16% whilst 10y hard currency yields tightened 49bps to 7.104%. Bank stocks rose significantly – Sberbank (+28.85%) and VTB Group (10.65%) both rallying in London trading. The moves also come before the anticipated press conference for Putin today.

Before we look at the day ahead, bourses in Asia are trading firmer as we got to print - following the lead from the strong US close. The Nikkei (+2.25%) and Hang Seng (+0.96%) are stronger, whilst Chinese equities have reversed earlier losses after reported new home prices dropped 3.7% yoy to mark the third straight decline with prices falling in 67 out of 70 cities. The CSI 300 and Shanghai composite are +0.69% and +0.67% respectively.

Looking ahead to today we kick off this morning in Europe with the German IFO and quickly follow up with retail sales in the UK. Later today we will also get construction output for the Euro-area as well as Italian trade data. In the US this afternoon, we start with the claims print and then quickly follow this up with flash composite and services PMI readings. We round out the releases with the Philadelphia Fed business outlook print and conference board leading index.