Market Wrap: Global Markets Rebound On ECB QE Hopes After IMF Cuts Global Growth Forecast Again

Hours after the IMF cut its global economic growth forecast yet again (which for the permabullish IMF is now a quarterly tradition as we will shortly show), now expecting 3.5% and 3.7% growth in 2015 and 2016, both 0.3% lower than the previous estimate (but... but... low oil is unambiguously good for the economy) and both of which will be revised lower in coming quarters, and hours after China announced that its entirely made up 2014 GDP number (which was available not 3 weeks after the end of the quarter and year) dropped below the mandatory target of 7.5% to the lowest in 24 years, it only makes sense that stock markets around the globe are solidly green if not on expectations of another year of slowing global economies, which stopped mattering some time in 2009, but on ever rising expectations that the ECB's QE will be the one that will save everyone. Well, maybe not everyone: really only the 1% which as we reported yesterday will soon own more wealth than everyone else combined and who are about to get even richer than to Draghi.

Asian equity markets traded mostly higher bolstered by better than expected Chinese GDP data which saw the Y/Y print snap its 4-consecutive year slowdown (7.3% vs. Exp. 7.2% (Prev. 7.3%), although YTD (7.4% vs. Exp. 7.3% (Prev. 7.4%) marked the slowest pace since 1990. Chinese Business News seemingly broke the data embargo by reporting the figures 10 minutes early. Retail Sales and Industrial Production readings topped expectations. This saw the Shanghai Comp (+1.8%) recover from its biggest loss since 2008 despite brokerages extending yesterday’s record losses, while Hang Seng closed up 0.9%. Nikkei (+2.1%) rose for a 2nd session lifted by a weak JPY ahead of tomorrow’s BoJ rate decision.

One of the more quoted pieces was yesterday's screed by Fed mouthpiece Jon Hilsenrath who said that the Fed is not prepared to delay rate lift-off despite Treasury bond yields trading near multi-year lows. Backing this statement was Mr QE4 himself, James Bullard, who earlier today also said that he is "eager for the Fed to raise rates soon." We leave it to readers to decide just how credible it is.

In today’s quiet session, small positive sentiment has filtered through from Asia following Chinese GDP which has supported European equities (Eurostoxx50 +0.59%) coupled with the forthcoming prospect of ECB QE. However, the DAX (+0.14%) underperforms, albeit in positive territory, as SAP is down 4.3% after cutting their 2017 profit forecast. In fixed income, trade has been relatively quiet as light volumes persist ahead of major economic events this week (ECB, BoC, BoJ rate decisions, BoE minutes) as the Bund trades flat. Stronger German ZEW M/M 48.4 vs. Exp. 40.0 (Prev. 34.9) did cause some volatility around the release but not enough to impact the ECB’s decision of potential further stimulus.

The USD-index (-0.07%) was stronger overnight following hawkish comments from Fed Watcher Hilsenrath. However in European trade, the USD-index has weakened and currently trades in negative territory, with AUD/USD and NZD/USD rebounding off lows following positive Chinese GDP and technical buying in AUD/USD. Separately, GBP/USD extends its gains with desks noting short covering after a 12 day low was hit in Asian trade and ahead of tomorrow’s UK jobs number and the BoE minutes.

In terms of the rest of the day ahead, this morning’s highlights will likely be the German ZEW survey with the market expecting a slight pickup. Elsewhere Italian trade data and German PPI headline what is a fairly quiet morning. Over in the US the calendar is similarly light with just the NAHB housing market index for January due.

Bulletin Headline Summary from RanSquawk and Bloomberg

  • Relatively quiet session with equity markets slightly higher across the board, although the DAX underperforms as SAP is down 4.3% following earnings, GBP outperforms ahead of tomorrow’s employment data and BoE minutes and Gold prints 4 month highs as the forthcoming prospect of ECB QE ahead of ECB’s rate decision on Thursday.
  • Looking ahead, sees the absence of tier 1 data and comments from BoE’s Cunliffe (Neutral), Fed’s Powell (Voter, Neutral), ECB’s Nowotny, President Obama’s State of the Union Address and earnings from Morgan Stanley, IBM and Johnson & Johnson.
  • Treasuries gain, U.S./Germany 10Y spread at narrowest since Oct. amid expectations ECB will announce a EU550b bond-purchase plan after its meeting ends on Thursday.
  • One option being considered by Draghi and the ECB’s executive board is to ring-fence risks by country; while that may win over some of Draghi’s opponents, it might also shine a spotlight on the lack of unity within the union
  • German investor confidence rose to the highest in 11 months in January, with the Zew index climbing to 48.4 from 34.9 in December
  • Denmark is trying to silence currency speculators as the government and central bank insist the Nordic country won’t follow Switzerland in severing its euro ties after it yesterday delivered a surprise rate cut to prevent the krone  gaining further
  • Credit Suisse Group AG and Saxo Bank A/S joined the list of European financial companies warning that the abrupt end to the cap on the Swiss franc may hurt their earnings
  • Syriza, the party that has vowed to negotiate a writedown on Greek public debt, widened its lead over Prime Minister Samaras’s party in three separate opinion polls just days before the general election
  • A Greek exit isn’t insurmountable as the euro area has become much stronger in recent years due to reforms in Ireland and Portugal, Christoph Schmidt, head of Merkel’s council of independent economic advisers, says in interview
  • China’s GDP grew 7.4% in 2014, weakest annual expansion since 1990
  • Islamic State militants threatened to kill two Japanese hostages just days after Prime Minister Shinzo Abe used a Middle East trip to pledge $200 million in non-military aid to nations confronted by the al-Qaeda breakaway group.
  • Sovereign 10Y yields mixed; Greece 10Y higher by ~22bps. Asian stocks gain; European stocks, U.S. equity-index futures rise. WTI crude higher, Brent little changed; copper and gold gain

US Event Calendar

  • 10:00am: NAHB Housing Mkt Index, Jan., est. 58 (prior 57)

DB's Jim Reid concludes the overnight recap

Before we take a look at markets yesterday, in Asia this morning Chinese equities have recovered part of yesterdays sell-off with the Shanghai Composite trading +0.52% firmer whilst credit spreads are also generally tighter. The better tone appears to be as a result of generally better than expected data out of the region this morning - in particular the 2014 GDP reading with the 7.4% print coming in a touch above consensus of 7.3% - albeit the lowest for 24 years. Elsewhere, retail sales were unchanged at 12.0% yoy for the year along with fixed assets (15.7%) whilst industrial production also came in a touch above consensus (8.3% vs. 8.2% expected). Bourses across the rest of Asia appear to be following the China lead with the Nikkei (+1.82%), Hang Seng (+0.43%) and Kospi (+0851%) all firmer as we go to print. Finally this morning and shortly after the China releases, the IMF released their updated forecasts for global growth this year, downgrading both 2015 and 2016 forecasts by 30bps to 3.5% and 3.7% respectively. The lower forecasts follow on from similar cuts from the World Bank earlier this month with both expecting the boost from the US and oil prices to be more than offset by lower forecasts elsewhere globally.

We’ll take a look at the day’s calendar at the end but today’s State of Union address by Obama could be worth keeping an eye this evening in the US time-zone. In terms of expectations, a Reuters article suggested that the focus will be income equality with potential agenda items including raising the tax rate on capital gains and dividends some 4% to 28%. Perhaps of more importance however will be the reaction of the now Republican controlled Congress given the somewhat divided views on fiscal policy between the parties. The speech also comes before the start of the World Economic Forum in Davos tomorrow which could well be the source of some headlines in the run up to the ECB on Thursday and Greek election on Sunday.

Taking a looking at markets yesterday, with the US shut for a public holiday it was all eyes on Europe and another decent day for equities with both the Stoxx 600 (+0.22%) and Dax (+0.73%) closing stronger. The Dax in particular closed up for the third day in a row and fifth day in six. Both markets did trade some 0.5% higher intraday before a late decline in energy stocks dragged equities down into the end of the session. Indeed, having closed on Friday at the highest level for a week, Brent (-2.65%) tumbled back below $50 to finish at $48.84/bbl. The move was not helped by news that Saudi Arabia's exports rose to a seven-month high in November whilst stockpiles were recorded at the highest level since January 2002. News on Reuters reporting the Iranian energy minister as saying that OPEC has no immediate plans to cut production and can sustain a fall in prices to $25 perhaps also put further pressure on prices. Energy stocks were the notable underperformer with the component closing -0.19%.

With little in the way of data, focus continues to be on the ECB meeting this Thursday. Reuters yesterday reported Merkel downplaying any impact on the single currency of the upcoming ECB meeting and Greek elections, specifically saying that ‘I wouldn’t call this a week of destiny for the euro, I have also said the euro crisis has not yet been fully overcome’. Also with regards to the Greek elections there were comments out of the ECB’s Moscovici who noted that the European Commission is prepared for many different scenarios regarding Greece and downplayed any potential Grexit. Meanwhile, ex-BoE governor King - who was also reported on Reuters - was quoted saying that further monetary stimulus is unlikely to help and instead we should worry about the continual weakness in global economic demand.

Swiss equities (+3.21%) closed in the green for the first time since the SNB action, although are still down over 11% since Thursday. The Swiss Franc weakened again for a second successive day against the Euro, closing -2.67% to CHF1.0207. Meanwhile Swiss 10y government bonds moved further into negative territory – tightening 4.6bps to -0.079%. Interestingly there was more surprise Central Bank action in Europe yesterday with Denmark cutting its deposit rate by 15bps to -0.2% and matching the lows of 2012. The Nationalbanken did however maintain the Krone peg versus the Euro, after earlier unconfirmed reports circulating on the wires (Bloomberg) that the currency may have been the next target of speculation. 10y Danish yields closed nearly 7bps tighter following the news.

Just rounding up yesterday’s moves, Italian Banks were a notable outperformer yesterday after news that the Italian Government is putting together a draft legislation aimed at forcing Italy’s largest cooperative banks to become joint stock companies. The FT noted that the move would look to remove the one shareholder, one vote rule which has in the past allowed unions at the Popolari banks to block past potential consolidations. Banco Popolare (+8.33%), Banca Popolare di Milano (14.89%) and UBI (+9.68%) all closed significantly higher on the back of the news.

In terms of the rest of the day ahead, this morning’s highlights will likely be the German ZEW survey with the market expecting a slight pickup. Elsewhere Italian trade data and German PPI headline what is a fairly quiet morning. Over in the US the calendar is similarly light with just the NAHB housing market index for January due.