Three days after Chinese stocks suffered their biggest plunge in 7 years, the bubble euphoria is back and laying ruin to the banks' best laid plans that this selloff will finally be the start of an RRR-cut, after China's habitual gamblers promptly forget the market crash that happened just 48 hours ago and once again went all-in, sending the Shanghai Composite soaring most since October 9, 2009, which gained 4.7% overnight after yesterday's 1.8% gain, led by financials and energy stocks with the biggest contributors being PetroChina +7.3%, Bank of China +9.9%, ICBC +6%, China Life +10%, Agbank +5.6%. The rebound means that after plunging and soaring in just about 72 hours, Chinese stocks are almost unchanged for the week, even though the 10-day volatility has surged to the highest since 2008. The reason for the surge: certainly not China's weakest GDP in 24 years, or renewed hopes for more rates cutes, but a report by Sina yesterday that China’s central bank rolled over medium-term lending facility to Industrial Bank and Shanghai Pudong Development Bank. In other words, as China takes away from margin trading with one hand, it continues to provide "stealth QE" to China's banks with the other.
That this won't end well is confirmed by the fact that the PBOC itself is now very much in the western central bank camp and is utterly clueless about not only what it is doing but what it will do:
- PBOC HAS NO INTENTION TO PROVIDE TOO MUCH LIQUIDITY: ZHOU
It wasn't just China that appears confused: so is the BOJ whose minutes disappointed markets which had been expecting at least a little additional monetary goosing from the Japanese central bank involving at least a cut of the rate on overnight excess reserves, sending both the USDJPY and US equity futures lower. Per Reuters: "The yen rebounded against the dollar on Wednesday after the Bank of Japan stood pat on monetary policy, as speculators who had anticipated more easing covered their short yen positions. The BOJ refrained from expanding its bond-buying stimulus programme, opting instead to expand loan schemes aimed at boosting lending. It also cut its inflation forecast to 1.0 percent from 1.7 percent in the wake of slumping oil prices." This is a problem which as we will show in a subsequent post citing Goldman, means that suddenly Kuroda is flirting dangerously close with also being SNBed and losing the market's confidence.
More details: The BoJ retained its plan for JPY 80trl annual rise in monetary base and lowered CPI forecasts as expected. The BoJ also expanded growth support funding facility by JPY 3trl to JPY 10trl and stimulating bank lending facility by 1yr as expected. Surprisingly, the BoJ was upbeat on the economy lifting 2015/16 real GDP forecasts. Nevertheless, today’s decision disappointed, with the derivatives markets pricing in some expectations for a more aggressive action including cutting of the IOER, ahead of the release which BoJ Kuroda said was not discussed. The Nikkei closed lower by 0.5%.
Finally, in the easter egg department, with the much-anticipated ECB announcement just 24 hours away, none other than the ECB's Ewald Nowotny threw a glass of cold water in the faces of algos everywhere when he said that tomorrow's meeting will be interesting but one "shouldn’t get overexcited about it." He said that he saw low inflation rates but did not expect deflation. Nonetheless, inflation developments need to be monitored closely, Nowotny said. Is it possible that with more than 100% of ECB QE priced in and every pundit betting the kitchen sink it is inevitable, that Mario Draghi still doesn't have the needed consensus and will disappoint tomorrow? If so, watch out for some serious fireworks as even more macro hedge funds blow up.
In Europe equities (Eurostoxx50 -0.02%) are off the lows of the session, however the continental exchanges have underperformed on position squaring ahead of the ECB tomorrow. The FTSE 100 (+0.8%) has remained stable which has helped it to outperform its mainland European peers.
In the UK, BoE minutes surprised the market as the MPC voted 9-0 vs. Exp. 7-2, with previous dissenters McCafferty and Weale changing their views due to weak inflation data. This caused GBP/USD to fall 72 pips to break below 1.5100, gilts to rally 36 ticks and the short sterling strip moved 6 ticks higher. However it wasn’t quite enough to shift rate hike expectations and the market still expects the first rate hike in Q1 2016. The minutes completely overshadowed the UK jobs report which was pretty much in line with expectations.
Looking at rates, Bunds (-53 ticks) have trended lower throughout the session on very thin volumes as prices move away from contract highs printed last week, the absorption of EUR 5bln of Bobl supply (the auction was also bad) and the falls have been further compounded by technical selling on breaks of last week’s lows. At the lows, volumes in Bunds over a minute timeframe were three times their average. Bunds now trade at levels last seen before the SNB/CHF move last Thursday.
Away from equities, overnight, spot gold (+0.27%) reached its highest level since August 2014 and breached the USD 1,300 level supported by the forthcoming prospect of QE from the ECB and the weaker USD (-0.26%). Brent and WTI crude futures head into today’s NYMEX open in the green after yesterday saw the biggest fall in a week as US market participants reacted to news from their prolonged weekend. "Prices this morning are recovering slightly from yesterday's price slide,” says Commerzbank analysts. “The short-term price outlook remains negative in view of the massive oversupply. We therefore expect to see falling prices in the coming wks, though marked price fluctuations in both directions may well occur from time to time."
Elsewhere, NatGas sees its biggest gain in a week after 3 consecutive days of ending in negative territory, this comes ahead of a cold snap in the US anticipated for Friday.
In terms of today’s calendar, with the lull in data before the ECB tomorrow the focus this morning will be on the UK with the Bank of England minutes which showed that all participants have now agreed there should be no rate hike, as a result pushing the GBP sharply lower. In the US this afternoon, we have housing starts and building permits for December. All eyes will no doubt be building to what could be a monumental day in Europe.
In Summary: European shares little changed, with the personal & household and oil & gas sectors outperforming and health care, basic resources underperforming. The U.K. and Dutch markets are the best-performing larger bourses, Swiss the worst. Swiss franc trades below parity with euro. Bank of England minutes show rate decision unanimous. U.K. unemployment rate below est. Bank of Japan cut its inflation forecast, maintains stimulus, yen rallies. Obama said in State of Union address that U.S. must address income gap. Davos World Economic Forum underway. Chinese stocks posted biggest two-day rally since 2009. The euro is stronger against the dollar. Japanese 10yr bond yields rise; German yields increase. Commodities gain, with copper, nickel underperforming and natural gas outperforming.
U.S. mortgage applications, housing starts, building permits due later.
- S&P 500 futures up 0% to 2017
- Stoxx 600 up 0% to 356
- US 10Yr yield up 2bps to 1.81%
- German 10Yr yield up 3bps to 0.48%
- MSCI Asia Pacific up 0.9% to 139.8
- Gold spot up 0.2% to $1297.4/oz
- Euro up 0.19% to $1.1572
- Dollar Index down 0.3% to 92.77
- Italian 10Yr yield up 1bps to 1.68%
- Spanish 10Yr yield down 1bps to 1.51%
- French 10Yr yield up 3bps to 0.68%
- S&P GSCI Index up 0.8% to 384.1
- Brent Futures up 1.8% to $48.8/bbl, WTI Futures up 1.1% to $47/bbl
- LME 3m Copper down 1.3% to $5614.5/MT
- LME 3m Nickel down 0.5% to $14700/MT
- Wheat futures up 1% to 542.5 USd/bu
Bulletin headline summary from Ransquawk and Bloomberg
- BoJ did not unveil any punchy new policies which left the market disappointed, as rumours preceding the meeting suggested that further stimulus may be on the cards, this consequently strengthened the JPY (USD/JPY -111pips)
- BoE minutes surprised showing a 9-0 vote vs. Exp. 7-2, as previous dissenters Weale and McCafferty cast doubts of a rate hike due to weak UK inflation numbers
- Looking ahead, sees US Housing Starts, BoC Rate Decision, API Crude Inventories, BoE’s Shafik, Boc Poloz, and earnings from eBay and American Express
- Treasuries decline led by 5Y and 7Y notes; German bunds also lower as markets prepare for ECB tomorrow; Governing Council member Nowotny said “one should not get overexcited” about one policy meeting.
- ECB will disappoint financial markets with a lower target for government-bond purchases than analysts are expecting, pushing up the euro and Treasury yields, Wells Fargo Asset Management predicts
- “If the ECB announces a healthy QE package, look for the bond markets across Europe to take profits which allow for a repricing of U.S. Treasuries over the next
several days,” ED&F Man head of rates and credit trading Tom di Galoma writes in client note
- UBS Group AG Chairman Axel Weber said the Swiss central bank “did the right thing” in scrapping its currency cap, a move that sent shockwaves through markets last week; “Better an end with a shock, than shocks with no end,” Weber said
- The two Bank of England policy makers pushing for rate increase dropped their call this month, leaving the bank unanimous in its decision to hold rates as inflation risks
falling below zero
- Japan’s central bank cut its inflation forecast and kept its unprecedented monetary easing unchanged as tumbling oil prices handicap efforts to reflate the world’s third-biggest economy
- Fed officials are starting to reassess their outlook for the economy as global weakness and disappointing data on American consumer spending test their resolve to raise interest rates this year
- After Switzerland shocked markets by scrapping its currency cap, investors are beginning to ask whether a policy surprise may be lurking for the dollar, too
- Sovereign yields mostly higher. Asian stocks gain, with Shanghai +4.7%; Nikkei -0.5%; European stocks, U.S. equity- index futures mixed. WTI and Brent higher; copper falls, gold steady
US Event Calendar
- 7:00am: Mortgage Applications, Jan. 16 (prior 49.1%)
- 8:30am: Housing Starts, Dec., est. 1.040m (prior 1.028m)
- Housing Starts m/m, Dec., est. 1.2% (prior -1.6%)
- 8:30am: Building Permits, Dec., est. 1.058m (prior 1.035m, revised 1.052m)
- Building Permits, m/m, Dec., est. 0.5% (prior -5.2%, revised -3.7%)
DB's Jim Reid as customary concludes the overnight recap
With all the news from the SNB and the ECB over the last week, Oil has taken a back seat for a few days but yesterday we saw fresh falls for both WTI (-5.41%) and Brent (-1.74%) to $46.47/bbl and $47.99/bbl respectively – the former somewhat ‘catching up’ after US markets were closed on Monday. With the market still weighed down by record Iraq crude production and comments from the Iranian energy minister that the nation can withstand $25 prices, news at the micro level caught our attention yesterday. Indeed, following on from the announcement from Schlumberger that it will cut 9000 jobs last week, it was perhaps unsurprising to see similar moves by oil services company Baker Hughes who expect to cut 7000 jobs in Q1 this year - equivalent to 11% of the workforce. As well as the redundancies, the company also noted that it expects capital spending to be around 20% lower this year, and the number of US rigs in operation down 15% in Q1 versus Q4 last year. Yesterday we also had similar news out of Total with the company expecting a similar cut in capital spending (10%) this year as well as an accelerated asset disposal program. If that wasn’t enough, after market close, commodities giant BHP announced that they are to cut the number of rigs in US shale by 40%. So more and more evidence of pain being felt at the micro level for companies as we move through the earnings season and it’s unlikely to be the last. It’s also a risk for the economy as investment and employment fall sharply in this sector. Can consumption gains more than offset this? This is one of the big questions at the moment and shows that the consequences of the sharp drop in Oil are not straight forward.
Quickly taking a look at trading this morning, Chinese equities continue to trade firmer with both the Shanghai Composite and CSI 300 up +3.64% and +3.83% respectively as we type. Yesterday, following the GDP numbers our China economics colleagues reiterated their full year forecast of 7% growth for 2015, with growth weighed towards the second half with the fiscal shock on local governments and weak property investment in lower tier cities likely to weigh on the first half. They also expect the government to cut the RRR by 100bps and interest rates by 50bps this year. Elsewhere this morning, the Hang Seng (+1.56%) and Sensex (+0.24%) are up however the Nikkei (-0.69%) is lower after the BoJ kept its monetary policy on hold but cut its core CPI forecast from 1.7% to 1% for 2015 fiscal year. The Yen is 0.8% stronger versus the Dollar at 117.9. In terms of Obama’s State of the Union address early this morning, there was little obvious market reaction with the President focusing on initiatives to boost wages and jobs in particular.
Overnight my team put out a note on the state of play in EUR credit pre Thursday's ECB meeting. In it we write that it has been our view that in a world where the Fed is no longer doing massive monthly QE global markets, including credit, will grow more volatile. However European IG credit is the one of the few areas where the prospect of ECB buying has dampened volatility. Nevertheless more external themes are impacting the asset class now. In fact so many factors are now exerting influence over European credit markets it is growing increasingly hard to tell what is and what is not priced in. Between the oil shock, the calling of an early Greek election and fears over Fed rate hikes on the one hand and the growing expectation of expanded ECB QE on the other the ultimate driver of the market has grown increasingly unclear. This note attempts to analyse the effects that the oil shock, Greek stress and evolving expectations of ECB QE have had on EUR credit with an eye to getting a sense for what is priced in with this week’s ECB’s meeting and Greek elections in focus. To give you a quick summary of the findings whilst it seems that EUR credit is pricing in some ECB QE expansion it remains hard to say exactly quite how much and so the initial reaction to any QE announcement is hard to call. However we still think looking to the coming months and quarters that if the ECB does announce and put into action an expansion of their QE program at least in-line with current market expectations EUR IG and especially HY credit has room to tighten.
Back to markets yesterday, US equities yesterday closed modestly firmer although generally traded between gains and losses over the bulk of the session as the Dow and S&P 500 closed +0.02% and +0.15% respectively. The latter initially traded some +0.5% higher on the back of a stronger European session, only to then pare those gains and fall 1.2% off its highs before rallying back into the close. The earlier weakness occurred after some weaker earnings prints out of Morgan Stanley and Johnson & Johnson whilst IBM reported fairly mixed earnings after the market close. Morgan Stanley in fact continued what has been a trend for banks so far with results weighed down by what was a poor quarter for FICC revenues. Energy stocks (+0.10%) proved resilient despite the weaker day for oil whilst consumer discretionary (-0.64%) and financials (-0.38%) were the notable underperformers. Credit markets were fairly subdued with CDX IG modestly wider (+0.19bps) although US HY energy names widened 5bps
It was a strong day for US Treasuries. 10y benchmark yields finished the day 4.9bps tighter at 1.788% after trading as much 8bps lower intraday. 30y yields also finished close to their all lows in yield, tightening 7.5bps yesterday to finish just above the recent lows at 2.378%. The data calendar was reasonably light with just the NAHB housing market index for January dropping one point to 57. Our US colleagues note that the latest reading is just 2 points shy of its September cyclical high however and that recovery in the index should point towards to further incremental improvement in housing starts and building permits due today.
Before this in Europe yesterday, equity markets closed firmer with both the Stoxx 600 (+0.79%) and Dax (+0.14%) up although both initially traded higher intraday. With little in the way of chatter from ECB officials ahead of tomorrow, focus was back on the data with the German ZEW survey in particular showing confidence levels rising significantly in Germany. The 48.4 reading for January came in well ahead of both the consensus (40.0) and the December print (34.9) and in fact rose to a 11-month high. Current expectations also rose - the index up to 22.4 from 10.0 last month. PPI however weakened further with the pressure of falling oil prices evident. The -0.7% mom print was below the -0.4% mom expected. Bond markets were fairly subdued. 10y Bund yields closed 1bp higher at 0.449% and 10y yields in both Spain (+0.9bp) and Italy (+0.7bps) also rose modestly.
Swiss equities (+0.32%) continue to bounce back with their second consecutive day of gains, although remaining 11% off the pre-Thursday levels. The Swiss Franc closed 0.92% stronger versus the Euro at CHF0.9886. Meanwhile in Greece, the latest opinion polls run by the University of Macedonia showed Syriza’s lead increasing to 6.5%, up from 4.5% in the same poll last week. A second survey run by Alco showed Syriza with a 4.6% lead, up from 3.5%. We’ve seen a range of some 3-6% in recent opinion polls for a Syriza lead however the latest trend appears to be that the data is lending further support to Syriza at the margin. The charm offensive by Syriza has taken an interesting twist as a column in the FT by Syriza’s leader Tsipras appears aimed at providing credibility to their economic policies. He again highlighted the need to end austerity and deep structural reforms as well maintaining that the current level of public debt is unsustainable and meeting payments difficult to do. Greek equities yesterday closed weaker, the ASE finishing -1.19%, its fourth decline in the last five sessions ahead of Sunday’s vote.
Before we move on to today’s data docket, European financials (+0.99%) led yesterdays gain in Europe after the ECB quarterly bank lending survey showed further improvement. A release by the ECB mentioned that ‘credit standards for all loan categories continued to ease in net terms in the fourth quarter of 2014’. The report also noted that net loan demand continued to pick up on the whole.
In terms of today’s calendar, with the lull in data before the ECB tomorrow the focus this morning will be on the UK with the Bank of England minutes due to be released along with the various employment reports for the country – unemployment in particular expected to tick below 6%. In the US this afternoon, we have housing starts and building permits for December. All eyes will no doubt be building to what could be a monumental day in Europe.