It started off as the perfect storm for futures: after Sunday night's latest plunge in WTI, which saw it drop to the lowest price since Lehman, the double whammy that has now forced Deutsche Bank to become the first major institution to forecast no growth for S&P500 EPS in 2015, namely the strong dollar, reared its ugly head and the EURUSD seemed dangerouly close to breaching the all important 1.04-1.05 support level we first noted last week. However, overnight parties tasked with preserving "financial stability" appear to have once again stepped in, and not only has the EURUSD rebounded off 1.05, but crude is now just barely down from the Friday close as all firepower is put to the same use, that sent the Shanghai Composite soaring by 2.3% overnight, and which sent the Dax over 12,000 for the first time ever.
In actual news, the collapse of Austria's Heta bad bank has claimed its first German casualty, Duesseldorfer Hypothekenbank, which would be bailed out by the German depositor protection agency, while moments ago the question whether Greek pensions would be plundered even more was answered affirmatively, when a Greek finance ministry official announced that Greece made a €584m repayment due to IMF.
But the main event this week will be none other than the FOMC's announcement on Wednesday when every algo will be programmed to scan the prepared text whether the word "patient" is present. As DB notes, "this week will be all about whether the Fed's bark is worse than its bite as the conclusion of the 2-day March FOMC takes centre stage on Wednesday. It seems increasingly likely that they'll remove 'patient' in order to give them increased flexibility but they'll probably want to stress data dependency as to if and when they raise rates. Perhaps the Fed's updated economic and financial projections will give us clues as to how likely a June rate hike might be. The dots will probably also garnish much attention both for the near-term dots and those that venture into 2016 and 2017. Overall as employment has seemingly met the criteria for lift off, much depends on how they see inflation and perhaps the dollar. These are currently good reasons to stay cautious with regards to hikes but how much will the Fed acknowledge them. We mentioned on Friday that headline CPI could be -0.43% come June and as regular readers will be aware we're still not convinced they'll be able to pull the trigger in 2015 even if they clearly expect and want to. Whatever happens, there should be plenty of inflation and dollar related questions in the press conference."
Should the Fed no longer be patient, expect the relentless strengthening move USD to resume for yet another parabolic thrust higher, assuring that S&P earnings post their first Y/Y decline since 2011.
Back to stocks, European equities have started the week on the front-foot, with the DAX breaking above 12,000 for the first time on record, albeit amid light macro newsflow. Gains for Europe have primarily been led by stock specific news with positive sentiment overnight, particularly in Asia also helping to prop up equities. More specifically, overnight the Shanghai Composite closed higher by 2.26% following comments from Chinese Premier Li who pledged to prop up the economy if growth was at risk of breaching a lower limit. Other than that, with a pretty light calendar for Europe, price action has been relatively muted with Bunds lower alongside the strength in stocks and USTs subsequently coming off their best levels seen overnight. In terms of the latest updates for Greece, A government source has stated that Greece will pay EUR 580mln tranche of its IMF loan due today.
One thing to be aware of is that Russian President Putin has ordered his troops to be on full alert today, according to Interfax. However, reports suggest that this is linked to continued drills in the country similar to what we saw last week.
In FX markets, the USD-index has yet again been the main driving force with participants using today’s subdued session as an opportunity to book profits from last week’s steep gains and ahead of Wednesday’s FOMC meeting. As such, the USD-index has broken below 100.00, much to the benefit of its major counterparts, subsequently lifting EUR/USD back above 1.0500.
In commodity markets, both Brent and WTI crude futures trade lower, albeit off their worst levels after falling by nearly 3% overnight on heavy trading volumes to touch their lowest intra-day level since March 2009. This followed last week’s sharp declines as the IEA indicated that they expect the global glut in oil to worsen, coupled with revival of the USD strength. Elsewhere, precious metal markets remain rangebound, while iron ore futures declined overnight with prices remaining near record lows as sentiment in China’s steel sector remains weak. Goldman Sachs lowers its US oil-production growth forecast to 230k bpd vs. Prev. 290k bpd Y/Y by Q4.
In summary: European shares rise close to intraday highs with the autos and financial services sectors outperforming and construction, utilities underperforming. WTI crude falls to lowest since 2009, euro strengthens from 12-year low vs dollar. German DAX index rises above 12,000 for first time. The Italian and Dutch markets are the best-performing larger bourses, Swiss the worst. The euro is stronger against the dollar. German 10yr bond yields rise; French yields increase. Commodities decline, with Brent crude, WTI crude underperforming and copper outperforming. U.S. Empire manufacturing, NAHB housing market index, industrial production, capacity utilization due later.
- S&P 500 futures up 0.4% to 2050.4
- Stoxx 600 up 0.6% to 399.1
US 10Yr yield down 1bps to 2.1%
- German 10Yr yield up 2bps to 0.28%
- MSCI Asia Pacific down 0.2% to 143.7
- Gold spot little changed at $1158.1/oz
- Eurostoxx 50 +0.8%, FTSE 100 +0.5%, CAC 40 +0.7%, DAX +1%, IBEX +0.6%, FTSEMIB +1.1%, SMI +0.3%
- Asian stocks fall with the Shanghai Composite outperforming and the ASX underperforming.
- MSCI Asia Pacific down 0.2% to 143.7, Nikkei 225 down 0%, Hang Seng up 0.5%, Kospi up 0.1%, Shanghai Composite up 2.3%, ASX down 0.3%, Sensex down 0.2%
- Euro up 0.33% to $1.0531
- Dollar Index down 0.4% to 99.93
- Italian 10Yr yield down 0bps to 1.15%
- Spanish 10Yr yield up 1bps to 1.16%
- French 10Yr yield up 1bps to 0.51%
- S&P GSCI Index down 0.4% to 391.7
- Brent Futures down 1.1% to $54.1/bbl, WTI Futures down 1.1% to $44.4/bbl
- LME 3m Copper up 0.4% to $5882.5/MT
- LME 3m Nickel up 0.4% to $14185/MT
- Wheat futures down 0.3% to 500.3 USd/bu
Bulletin Headline Summary
- Stock specific news and a strong close in China has seen the DAX break above 12,000 for the first time, with newsflow otherwise light
- The USD-index has moved back below 100.00 following profit-taking, subsequently leading EUR/USD back above 1.0500
- Looking ahead, today sees the release of US Empire Manufacturing and Industrial Production, as well as potential comments from ECB’s Draghi, Costa, Praet and Lautenchlaeger.
- Treasuries 7Y and longer gain, extending last week’s rally, as market participants await Fed statement, updated Summary of Economic Projections and Yellen press conference on Wednesday.
- Fed seen dropping “patient” from statement, moving closer to eventual increase in fed funds rate, analysts said
- Chinese policy makers will take action if China’s growth, which the government targeted at about 7% this year, drifts toward the lower limit of its range and cuts into employment or wages, Premier Li Keqiang said
- Greece is due to make its next repayment to the IMF Monday, further depleting cash reserves that risk running out this month unless a deal is reached with European partners
- 52% of Germans no longer want Greece to remain in the euro; 80% of Germans believe Greece “isn’t behaving seriously toward its European partners": poll by public broadcaster ZDF
- Duesseldorfer Hypothekenbank AG, a covered bond issuer bailed out by Germany’s deposit protection fund in 2008, is set to be rescued a second time as the country’s banks attempt to limit contagion from Austria’s decision to inflict losses on bondholders of Heta Asset Resolution AG
- Putin ordered troops placed on full combat readiness in snap drills in western Russia, as Defense Minister Sergei Shoigu warned the country was facing new threats to its security
- Brazil’s government will present a package of anti- corruption measures after more than 1 million people, some of them calling for President Dilma Rousseff’s impeachment, took to the nation’s streets Sunday
- Sovereign 10Y yields mixed. Asian stocks mixed, European stocks and U.S. equity-index futures gain. Crude lower, gold little changed, copper higher
US Event Calendar
- 8:30am: Empire Manufacturing, March, est. 8 (prior 7.78)
- 9:15am: Industrial Production, Feb., est. 0.2% (prior 0.2%)
- Capacity Utilization, Feb., est. 79.5% (prior 79.4%)
- Manufacturing (SIC) Production, Feb., est. -0.1% (prior 0.2%)
- 10:00am: NAHB Housing Market Index, March, est. 57 (prior 55)
- 4:00pm: Net Long-term TIC Flows, Jan. (prior $35.4b); Total Net TIC Flows, Jan. (prior -$174.8b)
- 2:45pm: ECB’s Draghi speaks in Frankfurt
- 8:30pm: Reserve Bank of Australia issues March meeting minutes
- 11:00pm: Bank of Japan issues policy statement, Kuroda holds news conference
DB's Jim Reid concludes the weekend event recap
The weather impact on data also continues to complicate the story and this has helped push negative US data surprises to their worst level in 6 years. The dollar might not be helping the data either and it’s interesting that David Bianco, our US equity strategist, again cut his S&P 500 EPS over the weekend from $120 to $118 due to the Dollar strength. This makes YoY numbers pretty much flat. So if correct this does make it difficult for US equities to get much momentum without a re-rating. This is tough in a world without Fed QE. So given continued ECB QE and help from a lower Euro we still think the Euro equities vs. US equity trade is still very much alive. The biggest concern is that this is becoming more consensus, however while inflows have stepped up in 2015, on a 12-month basis European equities have still seen outflows where US equities have seen sizeable inflows. So if the macro trends remain intact this trade should continue
Aside from the build up to this week’s FOMC, news flow was reasonably light over the weekend. One story that has generated some headlines this morning however is out of China where Premier Li Keqiang has suggested that the country will intervene should economic growth be at risk of breaching a ‘lower limit’. Specifically, Li was quoted on Bloomberg as saying that ‘the good news is that in the past couple of years we did not resort to massive stimulus measures for economic growth’ and ‘that has made it possible for us to have fairly ample room to exercise macro-economic regulation, and we still have a host of policy instruments at our disposal’. In terms of the market reaction, equity markets in China have bounced on the talks with both the Shanghai Composite (+1.92%) and CSI 300 (+2.03%) higher as we type. The former is in fact at its highest level since August 2009. It’s a generally positive tone across the Asia region with the Nikkei (+0.13%), Hang Seng (+0.40%) and Kospi (+0.24%) all firmer.
Recapping the price action on Friday, it continues to be a similar theme in the US as the Dollar extended gains and equity markets weakened and decoupled from Europe. The S&P 500 finished down 0.61% at the close to mark its third consecutive weekly decline - the second such occurrence this year already and which takes it back into negative territory YTD (-0.27%). There appears to be little let up for the Dollar however with the DXY finishing the day +0.90% and at the highest level since April 2003. This included a 1.31% gain versus the Euro to break $1.05 and finish at $1.0496. Treasuries on the other hand were subdued with benchmark 10y yields more or less unchanged at 2.114%.
Macro data on Friday was on the soft side. PPI in particular was a notable miss with the both the energy related headline (-0.6% yoy vs. 0.0% expected) and core (ex. food and energy) print (+1.0% yoy vs. 1.6% expected) surprising to the downside. The preliminary March reading for the University of Michigan consumer sentiment was a significant miss also. The 91.2 reading was down 4.2pts from the previous print to mark the lowest level since November last year, supported by both a fall in the current conditions and expectations indices. The reading did however reveal a slight uptick in inflation expectations at both the 1y and 5-10y ranges.
Oil was once again generating headlines as both WTI (-4.70%) and Brent (-4.22%) declined to $44.84/bbl and $54.67/bbl respectively. Both markets have declined around a percent further in trading this morning with WTI at one point trading at its lowest intraday level since March 2009. The latest leg down appears to be as a result of a report from the IEA that higher US inventories ‘would inevitably lead to renewed price weakness’. The agency also cited that the appearance of any price stability was a ‘façade’ and that the ‘rebalancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly’.
Over in Europe meanwhile, the QE momentum train continued with the Stoxx 600 (+0.32%), DAX (+0.87%) and CAC (+0.46%) all finishing firmer whilst Xover closed 2.5bps tighter. It was more of a subdued day for peripheral sovereign bonds with 10y yields in Spain (+0.3bps) and Italy (+2.1bps) a touch weaker although yields in Portugal (-1.7bps) continued their downward trend to mark a fresh record low at 1.56%. Bunds were a touch softer (+1bp) at 0.256%. The first week of ECB QE has certainly made its mark in terms of price action however. The Stoxx 600 (+0.62%), DAX (+3.04%) and CAC (+0.93%) have all strengthened, 10y yields in Germany (-14bps), Spain (-15bps), Portugal (-20bps) and Italy (-17bps) are all lower and the Euro is some 3% weaker versus the Dollar.
Indeed, Italian finance minister Padoan has so far deemed the programme a success with the weaker Euro in particular being in line with the Euro-area’s long term economic outlook. Greek finance minister Varoufakis appears to have taken a slightly different stance thus far however. Specifically, Varoufakis was reported on Reuters as saying that the programme will fuel an unsustainable stock market rally and is unlikely to boost euro zone investments. In terms of the latest on Greece meanwhile, both Varoukais and PM Tsipras were reported in the weekend press saying that the nation is not facing a cash shortage. Specifically, Tsipras was reported on Ekathimerini as saying that ‘there is absolutely no problem with liquidity’. The comments come ahead of the latest funding requirements this week where the government will be required to refinance €1.6bn of T-Bills and repay over €900m in IMF payments.
Taking a look at this week’s calendar, it’s a quiet start in both the Asia and European time zones with no data releases of note although the ECB’s Draghi and Lautenschlaeger are due to speak this morning in Frankfurt and the EU foreign ministers are due to meet in Brussels. Over in the US this afternoon, we’ve got the industrial and manufacturing production prints, March reading for empire manufacturing and also the capacity utilization reading for February. The calendar picks up a bit tomorrow and we start in Japan with the BoJ monetary policy meeting which are becoming interesting given some hints of policy tensions in the council. Focus in Europe will be on the final February CPI readings for the Euro-area as well as the ZEW survey out of both the Euro-area and Germany. Employment data out of the Euro-area is also due on Tuesday morning. The main focus however will of course be the start of the FOMC meeting in the US on Tuesday. Data prints in the US on Tuesday include the February housing starts and building permits. We kick off Wednesday with trade data out of Japan. Closer to home, the (pre-election) Budget, BoE minutes and various employment indicators in the UK will be a big focus, whilst trade data for the Euro-area rounds off the prints in the morning. The conclusion of the FOMC will of course be the key event for markets along with the associated Yellen press-conference shortly after. There is little in the way of releases for Europe and Asia on Thursday with focus instead on the US where we get trade data, jobless claims, the leading index and the Philadelphia Fed business outlook. We finish the week on Friday with PPI due for Germany, and net borrowing data due out of the UK. Its quiet data-wise in the US on Friday with no releases due however we’ll keep an eye on the Fed’s Evans and Lockhart who are both due to separately speak on monetary policy.