Start Of European QE Upstaged By Greek Jitters; Apple Unveils iWatch

Because as everyone knows, the one main problem facing Europe today is not trillions on non-performing loans, rampant unemployment, deflation, the surge of anti-austerity political parties coupled with rising xenophobia, and broad socio-economic instability, but bond yields which are not negative enough, earlier today first Germany, then Italy, then France were all delighted to announced they have commenced buying sovereign bonds in the open market, culminating with the following tweet by the ECB intern moments ago:

The buying promptly led to Bund yields once again sliding lower, and the 10Y was down -5bps to 0.35%, on its way to -0.20%. Italy’s 10-year yield declined three basis points to 1.29 percent. As Bloomberg reports, “The QE purchases are having the expected effect and the market is very positive,” said Michael Leister, a senior rates strategist at Commerzbank AG in Frankfurt. “In the core we’re seeing yields dropping sharply lower led by the ultra-long end so these are very much QE-style moves. Near-term it’s going to stay quite volatile because there are some sellers who did front-run these purchases and now are keen to sell.”  Then again, judging by the early reaction in yields, there are more keen buyers and frontrunners than sellers.

Since negative yields across the flat European curve is now just a matter of time, we hope that the millions in record youth unemployed across the continent managed to BTFD in Bunds - this may be all they need to get their lives back in order.

And while the core of Europe was delighted by the start of the latest central bank bond monetization program, one place that felt left out of the punchbowl party was Greece, whose entire curve and especially the short-end was blowing out once more:

  • 09-Mar-2015 04:52 - 2-YR GREECE YIELDS 14.99%; +117BPS - TRADEWEB
  • 09-Mar-2015 04:52 - 5YR GREECE YIELDS 13.04%; +105BPS - TRADEWEB
  • 09-Mar-2015 04:53 - 10YR GREECE YIELDS 9.70%; +38BPS - TRADEWEB

The reason for the latest bout of Greek weakness, which has also pushed Greek stocks lower by 3% this morning, is that as reported here before, the Eurogroup - which is due to meet today to discuss the latest Greek reform proposal and as a result refuse to unlock some €7 billion funds - has thrown up on the Varoufakis "tourist tax inspector" list submitted on Friday. From Bloomberg:

Greece’s provisional agreement with creditors to avert a default started to crack as European officials said the country’s latest proposals fell far short of what was put forward two weeks ago and Greek ministers floated the prospect of a referendum if their reforms are rejected.


The list of measures Greece’s government sent to euro-region finance ministers last Friday, including the idea of hiring non-professional tax collectors, is “far” from complete and the country probably won’t receive an aid disbursement this month, Eurogroup Chairman Jeroen Dijsselbloem said on Sunday. German Deputy Finance Minister Steffen Kampeter said ministers are not expected to advance on Greece today.


It’s not enough to exchange letters with non-committal statements,” Kampeter told Deutschlandfunk radio. “What’s needed is hard work and tough discussions.”

As Reuters adds, the "list of reforms proposed by Greece last week to help it win creditor support is "far from complete," the head of the Eurogroup said. Speaking at an event in Amsterdam on Sunday, Jeroen Dijsselbloem, who is also Dutch finance minister, said the Greek proposal was "serious" but not enough."

Dijsselbloem, whose Eurogroup of euro zone finance ministers will discuss Greece at a meeting on Monday, said Athens had submitted six proposals, with more expected to come.


"The six, those are just the first six. Those absolutely won't be accepted as the 30 percent that they wanted to replace," he said. "The Greeks know that too, by the way, they don't have any pretence that this is it."


Dijsselbloem's remarks refer to plans by the new Greek government to replace some of the budget consolidation measures agreed to by the previous government with different reforms. Once steps to reach these goals are taken, Greece would become eligible for more credit from the euro zone and the International Monetary Fund, and its banks could again finance themselves at European Central Bank open market operations.


Time is pressing because Greece is expected to run out of cash later this month.

Of course, any other time the prospect of an all too real Grexit would have sent Europe crashing, however now that everyone is selling to the infinite buyer that is the ECB, the Greek moment of peak leverage has long since passed.

Finally, on the calendar today is perhaps the most anticipated non-event by the one company whose cell-phone now means more to the price and earnings of the S&P 500, and now Dow Jones Industrial Average, than any other product in history, when Apple releases its iWatch. Now in plastic, and/or gold.

A closer looks at European equities shows that there was less euphoria than met the Q€ eye, as stocks started the week off on the back-foot after taking the lead from the losses seen on Wall Street on Friday and the downside in Japanese equities overnight, with concerns over Greece also adding further fuel to the fire. More specifically, ahead of today’s Eurogroup meeting, Eurogroup President Dijsselbloem has deemed the latest proposals from Greece as far short of what was offered 2-weeks ago, while Greek Finance Minister Varoufakis said they may call for a referendum or even early elections if the Eurozone do not accept their restructure plans. This has subsequently dampened expectations for Greek/Eurogroup negotiations and led to a risk-averse tone thus far, although the German Deputy Finance Minister has stated he does not expect Eurogroup to make final decision on Greece during today's meeting.

Bunds currently trade higher as flows move away from equities and into German paper, with European fixed income products further bolstered today by the ECB beginning their bond-buying programme. Talk has been doing the rounds this morning that the ECB have begun buying French and Belgian paper, with both nation’s spreads subsequently tighter to the German benchmark. However, given the apprehension surrounding Greece, the GR/GE spread is wider by just over 40bps, of note, Greek bonds are not eligible for the ECB QE programme.

Asian stocks fell after tracking Friday’s sell-off on Wall Street following the stellar US jobs report which spurred pending Fed rate hike fears. Nikkei 225 (-1%) was further weighed on by disappointing Japanese GDP (Q/Q 0.4% vs. Exp. 0.5% (Prev. 0.6%). Hang Seng (-0.2%) and Shanghai Comp (+1.9%) swung between gains and losses as gains in big banks outpaced losses across brokerages after the CSRC said it may issue banks with brokerage licences. Chinese trade balance printed a record surplus (M/M 60.62bln vs. Exp. 6.00bln (Prev. 60.03bln. Exports 48.3% vs. Exp. 14.0%; 5yr high), was largely shrugged-off due to seasonal distortions namely the recent Chinese Lunar New year. JGBs fell amid sharp curve steepening on the back of Friday’s post-NFP inspired sharp rise in UST yields and USD/JPY.

Fed’s Fisher (non-voter, hawk) said future path of interest rates is upward. (BBG) Fed’s Lacker (voter, hawk) said June is in pole position to see the Fed's first rate hike. (BBG)

FX markets have seen a relatively steady start to the week with the economic calendar particularly light. Nonetheless, despite the cautious tone emanating from the Eurozone, EUR/USD has seen a modest bid in early trade as the USD-index (-0.2%) pulls away from the 11 and a half year highs seen on Friday. This pullback in the USD has also benefitted antipodean currencies which were initially lower overnight, with AUD weighed on by the lacklustre imports component of the Chinese trade balance and NZD by expectations of potential further easing ahead of the RBNZ rate decision on Wednesday. As things are currently quiet in FX markets, option expiries could dictate the state-of-play with AUD/USD currently trading in close proximity to a large option expiry (USD 1bln at 0.7740) due to roll-off at tomorrow’s NY cut.

According to source reports, the SNB may cut rates to -1.5% if CHF moves in an unfavourable direction. However, a spokeswoman for the SNB declined to comment on the news. (Schweiz am Sonntag)

In the commodity complex, both WTI and Brent crude futures have swung between gains and losses throughout the session, following various comments over the weekend whereby the OPEC Chief stated that the market is still oversupplied with oil, while Goldman Sachs expect the recent upside in WTI to be short-lived, with prices potentially slipping to USD 40/bbl amid additional inventory increases in the US. In precious metals markets, spot gold and silver trade in modest positive territory with prices relatively rangebound. Overnight, Copper prices saw a mild loss, while China’s benchmark import iron ore declined below USD 60/ton amid further evidence of weak China demand as customs data showed lower imports of copper and iron ore during February.

In summary: European shares fall with the real estate and financial services sectors underperforming and banks, resources outperforming. ECB said to begin buying German govt bonds. Japan 4Q GDP growth below estimates. European officials say Greek reform list inadequate. The Swedish and Dutch markets are the worst-performing larger bourses, the Italian the best. The euro is stronger against the dollar. German 10yr bond yields fall; Japanese yields increase. Commodities little changed, with natural gas, Brent crude underperforming and wheat outperforming.

There are no key releases today however the Fed’s Mester and Kocherlakota are due to speak. ECB starts QE. Apple unveils iWatch.

Market Wrap

  • S&P 500 futures down 0.1% to 2067.6
  • Stoxx 600 down 0.6% to 391.9
  • US 10Yr yield down 2bps to 2.22%
  • German 10Yr yield down 5bps to 0.34%
  • MSCI Asia Pacific down 0.8% to 144.3
  • Gold spot up 0.6% to $1174.1/oz
  • 0 out of 19 Stoxx 600 sectors rise; bank, resources outperform; real estate, financial svcs underperform
  • Eurostoxx 50 -0.4%, FTSE 100 -0.5%, CAC 40 -0.5%, DAX -0.3%, IBEX -0.6%, FTSEMIB +0%, SMI -0.4%
  • Asian stocks fall with the Shanghai Composite outperforming and the Sensex underperforming.
  • MSCI Asia Pacific down 0.8% to 144.3
  • Nikkei 225 down 1%, Hang Seng down 0.2%, Kospi down 1%, Shanghai Composite up 1.9%, ASX down 1.3%, Sensex down 1.6%
  • Euro up 0.4% to $1.0887
  • Dollar Index down 0.22% to 97.4
  • Italian 10Yr yield down 3bps to 1.28%
  • Spanish 10Yr yield down 3bps to 1.26%
  • French 10Yr yield down 6bps to 0.63%
  • S&P GSCI Index down 0.1% to 411.5
  • Brent Futures down 0.8% to $59.3/bbl, WTI Futures up 0.1% to $49.7/bbl
  • LME 3m Copper up 0.4% to $5770/MT
  • LME 3m Nickel down 0.2% to $14340/MT
  • Wheat futures up 1.4% to 489.3 USd/bu

Bulletin Headline Summary

  • European equities feel the squeeze after Eurogroup President Dijsselbloem has deemed the latest proposals from Greece as far short of what was offered 2-weeks ago
  • Weak stocks has subsequently supported fixed income markets, with European paper further bolstered by the commencing of the ECB’s bond-buying programme
  • Sources suggest the SNB could cut rates to -1.5% if CHF moves in an unfavourable direction
  • Treasuries gain amid rally in EGBs as ECB said to start QE with purchases of German and Italian debt; German 10Y yield falls to 0.348%.
  • Greece’s provisional agreement with creditors started to crack as European officials said latest proposals fell far short of what was put forward two weeks ago; Greek ministers floated the prospect of a referendum if reforms are rejected
  • Holding referendum on reforms sought by Greece’s creditors or early elections is “the Greeks’ decision” and would just delay need for economic overhaul, German Deputy Finance Minister Steffen Kampeter says in Deutschlandfunk radio interview
  • U.K. fraud investigators have called in former traders from Barclays Plc and Deutsche Bank AG for questioning as part of a criminal probe into the suspected rigging of Euribor rates: FT
  • Japan’s emergence from recession was weaker than first estimated as companies unexpectedly cut investment and drew down their inventories, offsetting a pickup in consumer spending
  • China’s exports surged more than 48% in February from a year earlier, exceeding the median analyst forecast for a 14% jump, led by sales to the U.S. and Europe
  • Niger’s army crossed the border into Nigeria to join a regional offensive against Boko Haram as the militant group pledged allegiance to Islamic State
  • Sovereign 10Y yields mostly lower. Asian stocks mostly lower, Shanghai gains 1.7%; European stocks, U.S. equity- index futures decline. Crude falls, gold and copper gain

US Economic Calendar

  • 10:00am: Fed Labor Market Conditions Index Change, Feb. (prior 4.9)
  • 1:05pm: Fed’s Kocherlakota speaks in Minneapolis
  • 2:25pm: Fed’s Mester speaks in Washington
  • 7:30pm: Fed’s Fisher speaks in Houston

* * *

DB's Jim Reid Concludes the overnight event roundup

On the day that QE starts in Europe if there's anyone in doubt that central banks continue to dominate the investment landscape then Friday might help persuade them otherwise. The bumper payroll number (+295k vs. +235k expected, +5.5% vs. +5.6% on unemployment) saw the S&P 500 (-1.42%) see its worst day since January 5th, 10-yr USTs spike 12.6bps higher, Dec-16 Fed Funds futures rise 12bps and the dollar hit 12-year highs. Elsewhere Gold (-2.60%) tumbled and emerging market currencies sold off (Brazilian Real -2% and Colombian Peso -1.5%). Obviously the better number increased the probability of an earlier lift-off from the Fed and US sensitive risk assets weren't overly impressed and herein lies one of the challenges facing the Fed. How to normalise policy when so many global assets have been dependant on ultra easy policy.

Taking the other side of the central bank ledger it was interesting that just a week after we highlighted that Portuguese 10-year yields fell below USTs for the first time since October 2007 (a rarity through history), on Friday the former closed 48bps through the latter as Portugal bucked a bad day for global bonds and rallied another 3.3bps ahead of ECB buying. For yields generally in Europe the drag from payrolls was enough to see yields drift higher on Friday with 10y yields in Germany (+4.6bps), France (+4.6bps), Italy (+1.0bps) and Spain (+1.4bps) all closing higher.

In terms of this morning, focus is on China where over the weekend we got the February trade report for the nation. Although exports surged during the month (48.3% vs. 14.0% expected), imports continue to be weak and declined further to -20.5% yoy (and softer vs. expectations of -10.0%). The weak import numbers highlights what continues to be weak underlying demand and our China economist Zhiwei Zhang notes that the weakness cannot all be explained by commodity prices as the volume of imports dropped sequentially. We have inflation numbers tomorrow and the usual big monthly day of activity data on Wednesday so plenty of information to gauge current activity this week.

In terms of market reaction in Asia, Chinese equities are the notable laggards this morning with the Shanghai Composite and CSI 300 down -1.0% and -1.3%, respectively. The weak Chinese import data is perhaps playing a part but in reality the broader market is also taking cues from the US session weakness on Friday. Across the region the Nikkei, KOSPI and ASX 200 are all down -0.9%, -0.9% and -1.3%, respectively as we go to print. The Asia iTraxx is around 3bp wider but the technicals for cash bonds are still supported by the absence of supply in recent weeks. We are also seeing a continuation of Dollar strength overnight with the JPY and AUD down 0.2-0.3%. Gold (+0.2%) is modestly off its Friday lows but we are still more than 3% below where we were last week. The UST 10yr yield is little changed levelling off at around 2.23% after the sell-off on Friday.

We’ll touch on the week ahead at the end but this morning’s attention will no doubt be on the Eurogroup meeting where focus will be on Greece. The main news over the weekend appears to be reports on various wires that Greece may call a referendum or have early elections according to Greek finance minister Varoufakis. In an interview with Italian press Corriere della Sera, Varoufakis was reported as saying that should Europe ultimately reject Greece’s proposals, then ‘there could be problems but, as my prime minister has said, we are not yet glued to our chairs and we can return to elections, call a referendum’. Meanwhile comments from the EC’s Dijsselbloem ahead of today’s meeting appear to be cautious having said that the letter of proposals submitted by Greece is ‘helpful’ but will need to be scrutinized by Greece’s creditors.

Back to markets on Friday, there was some hawkish commentary out of Fed officials following the employment report. Richmond Fed President Lacker was first of all quoted as saying that ‘given today’s employment report, right now, June would strike me as the leading candidate for lift off’ (Reuters). Meanwhile, the Fed’s Fisher (retiring non-voter) was quoted on Bloomberg as saying that the Fed should consider raising rates as soon as this month. In terms of the rest of the data on Friday, our US colleagues noted that the breadth of employment gains in particular were strong with the diffusion index of private employment rising to 65.4% from 62% last month. Meanwhile the average weekly hours print was unchanged at 34.6 hours and the labor force participation rate ticked down slightly to 62.8% (from 62.9% previously). If there was one dovish element to the report it was the lack of wage pressures. Away from the employment indicators, the US also reported a trade deficit of $41.8bn which was a touch higher than expected ($41.1bn consensus).

In Europe on Friday, bourses generally closed firmer with the Stoxx 600 (+0.10%), DAX (+0.41%) and CAC (+0.02%) all finishing in positive territory for a third consecutive day. Data was also supportive. Industrial production for Germany in particular was the standout with the +0.9% yoy reading ahead of market expectations of -0.2%. Our colleagues in Europe noted that the reading points to upside risks for their Q1 GDP forecast (+0.5% qoq) and highlighted a positive weather effect on construction. Elsewhere, the preliminary Q4 GDP reading for the Euro-area was unchanged at +0.9% yoy. There was some focus on the UK meanwhile where consumer expectations for inflation fell to the lowest in nearly 15 years in February, +1.9% over the next 12 months whilst five-year expectations are down to 2.8% and the lowest since August 2009.

Moving on to credit markets, we have continued to see notable inflows into HY funds, particularly in Europe. The past week (Wednesday-Wednesday) saw a record level of inflows (>$900mn) into Western Europe HY funds (in notional terms). This also pushed the 4-week moving average to a record level ($665mn). As a percentage of NAV the 1.7% for the latest week is the highest level since October 2013. These latest inflows extends the run of consecutive weekly inflows to 8, with YTD cumulative net inflows now in excess of $4bn (8.4% of NAV). The first 9 weeks of 2014 saw just under $2.9bn in cumulative net inflows (9.5% of NAV). Whilst US HY funds also saw inflows during the latest data week at $720mn they were not as impressive as those in Europe although YTD cumulative inflows have been in excess of $10bn or just under 4% as a percentage of NAV.

Turning over to the week ahead, the highlight this morning will be the aforementioned Eurogroup meeting where we expect Greece to be front and centre. Away from this, we’ve got trade data out of Germany and Euro-area confidence due this morning. Meanwhile, it’s the usual post-payrolls lull in the US this week. There are no key releases today however the Fed’s Mester and Kocherlakota are due to speak. Kicking off Tuesday will be money supply data out of Japan as well as CPI and PPI out of China. Closer to home we’ve got industrial production numbers for January due in France and Italy as well as the manufacturing print for the former. The calendar picks up a notch in the US with JOLTS, wholesale inventories and the NFIB small business optimism survey all due. Focus on Wednesday will likely be in the Asia timezone and in particular in China when we get retail sales, industrial production and fixed assets data for February. Machine tool orders and PPI for Japan are also due. It’s fairly quiet in Europe with just industrial and manufacturing production for the UK due along with German labour costs and French employment data. The monthly budget statement in the US will be worth keeping an eye on Wednesday. Focus on Thursday will be in Germany where we get the final revision to the February CPI reading following a +0.1% yoy headline in the last revision. We will also get inflation data out of France as well as UK trade data and Euro-area industrial production. It’s a busier day in the US too with the highlight being the February retail sales print. Initial jobless claims, import price index and business inventories are also due. We close out the week in Japan with industrial production whilst closer to home we see Italian CPI and UK construction output. In the US we finish with PPI and the preliminary March reading for the University of Michigan consumer confidence.