Less than a week ago, fresh from the aftermath of the recent dramatic six-sigma move in German Bunds, one of Europe's largest banks openly lamented that so far the ECB's QE had done absolutely nothing: "two months of QE for nothing. Well, not strictly true of course, for inflation expectations are up 30bp and Euro stocks are still up 15% since January even after investors withdrew $1.5bn last week. But look at the euro. EUR/USD yesterday returned over 1.1350, the highest level since the ECB announced QE on 22 January."
And lo and behold, as if on demand, late last night the ECB confirmed (however for some reason it took over 12 hours for the headlines to filter through to the newswires perhaps just to make it easier for hedge funds to frontrun the broader market ahead on ECB disclosures) it had heard the ECB's lament when on the evening of May 18, ECB executive board member Benoit Coeure delivered a speech at the Brevan Howard Centre for Financial Analysis (appropriately named after a hedge fund) at Imperial College Business School (not to be confused with the July 26, 2012 Mario Draghi "whatever it takes" speech which also took place in London) in which he said that the ECB intends to "frontload" i.e., increase, its purchases of euro-area assets in May and June ahead of an expected low-liquidity period in the summer.
Quotes by Bloomberg, Couere said that “We are also aware of seasonal patterns in fixed-income market activity with the traditional holiday period from mid-July to August characterized by notably lower market liquidity... If need be, the frontloading may be complemented by some backloading in September when market liquidity is expected to improve again. The slightly higher purchase volume that market analysts may observe in the coming weeks is therefore unrelated to the recent episode of market volatility.”
In other words, while the ECB may have been behind the recent Bund sell off (simply to buy itself more runway as the last thing Draghi wanted was a negative Bund yield some 15 months before the end of Q€), it was shocked by the speed and severity of the selloff, and now is damage control time, which will manifest itself in the ECB buying up bonds double speed in the market during what as we noted before, is a positive net issuance period, ahead of Germany returning once more to negative net issuance.
The post-mortem comments were just as expected: “That’s exactly what the market needs to calm down,” said Karsten Junius, chief economist at Bank J Safra Sarasin Ltd in Zurich. “It will take fear out of the market that high negative net issuance in the summer leads to less market volume in the summer.”
In other words, after two months of QE almost led to a bond market crash, the ECB will no longer engage in volatility acrobatics having realized just how "much" bond market liquidity there is, and the result will be slow, smooth buying, and yes: a return to a negative yield trendline for the entire Bund curve, whose drift back to -0.20% is now just a matter of time.
Of course, the real reason why the ECB is "front-loading purchases" is quite simple: in May the net supply of Eurozone bonds is greatest, and the ECB is desperate to soak it all up before the upcoming negative issuance dead zone which will send yields plunging.
In all the ECB confusion the collapse in German ZEW which plunged to 41.9 in May, more than the 49 drop forecast and lowest since Dec., from 53.3 in April, was completely ignored by everyone.
Needless to say stocks were euphoria by this ECB update and following the Eurex open, European equities were seen higher across the board in a continuation of the sentiment seen yesterday on Wall Street with a record close for the DJIA and S&P 500 but more notably, there was an immediate spike higher in Bunds, pressure placed on EUR and further strength in Equities. Additionally, ECB’s Noyer said the central bank would be willing to continue purchases beyond September 2016 if required. All European equities trade firmly in the green, although there is some modest undperformance in the FTSE 100 with mining names weighed on by lower commodity prices, while Vodafone have been dragged lower in the wake of their earnings.
In terms of Greek assets, the 2yr yield trades lower by around 90bps while the ASE trades higher by around 1.8%. This comes slightly more upbeat reports for Greece with PM Tsipras stating that discussions with creditors are near the end, with the government willing to compromise to reach a deal. Furthermore, EU's Juncker expects an aid agreement is to be reached on Greece by the end of this month or the beginning of June however, said that an aid deal will not be reached in Riga this week.
FX markets initially saw a tentative start to the session with the USD-index extending on yesterday’s gains, with the move to the upside given a boost by the aforementioned Coeure comments which saw EUR/USD break back below 1.1200, with EUR unreactive to the inline Eurozone inflation data and German ZEW survey despite a modest downtick in the DAX. In terms of the UK inflation data, GBP weakened heading into the release with some participants expecting a negative Y/Y print, which turned out to be the case upon the release, with the metric now at -0.1%. However, one things for consideration is that this is in-fitting with the findings of last week’s QIR.
In the commodity complex, the main source of traction has stemmed from the stronger USD with both WTI and Brent crude futures subsequently lower (WTI Jun’15 futures to expire at 1930BST today). In a similar manner, both spot gold and silver trade lower, while spot iron ore fell to 2 week lows amid a stall in restocking at Chinese steel mills and the strong USD. Goldman Sachs forecasts oil prices to retrace from lows, falling to USD 45/bbl by October; 12-month forecast at USD 55/bbl. (BBG)
In Summary: European shares remain higher though trading off intraday highs with the autos and real estate sectors outperforming and basic resources, telcos underperforming. ECB to moderately frontload QE in May, June, board member Coeure says. Greek leaders say deal within reach amid creditor doubts. U.K. inflation falls below zero for first time since 1960. German ZEW investor expectations below ests. European car sales rise for 20th straight month in April. The French and German markets are the best-performing larger bourses, Swedish the worst. The euro is weaker against the dollar. German 10yr bond yields fall; French yields decline. Commodities decline, with nickel, silver underperforming and natural gas outperforming. U.S. housing starts, building permits due later.
- S&P 500 futures up 0.3% to 2131.8
- Stoxx 600 up 1.3% to 403.1
- US 10Yr yield down 3bps to 2.2%
- German 10Yr yield down 7bps to 0.58%
- MSCI Asia Pacific up 0.1% to 153.5
- Gold spot down 0.4% to $1220.4/oz
- Eurostoxx 50 +1.1%, FTSE 100 +0.3%, CAC 40 +1.8%, DAX +1.7%, IBEX +1.3%, FTSEMIB +1.3%, SMI +0.8%
- Asian stocks little changed with the Shanghai Composite outperforming and the ASX underperforming.
- MSCI Asia Pacific up 0.1% to 153.5; Nikkei 225 up 0.7%, Hang Seng up 0.4%, Kospi up 0.3%, Shanghai Composite up 3.1%, ASX down 0.8%, Sensex down 0.2%
- Euro down 0.98% to $1.1204
- Dollar Index up 0.69% to 94.87
- Italian 10Yr yield down 9bps to 1.8%
- Spanish 10Yr yield down 10bps to 1.74%
- French 10Yr yield down 8bps to 0.86%
- S&P GSCI Index down 0.8% to 445.2
- Brent Futures down 1% to $65.6/bbl, WTI Futures down 0.8% to $59/bbl
- LME 3m Copper down 1.6% to $6281/MT
- LME 3m Nickel down 2.5% to $13400/MT
- Wheat futures down 1.2% to 515.5 USd/bu
Bulletin Headline Summary from Bloomberg and RanSquawk
- Comments by ECB’s Coeure saying that due to seasonal factors QE purchases will be front loaded to May and
June helped spur a move higher in Bunds and European equities, weighing on EUR
- GBP is seen weaker in the wake of UK inflation falling into negative territory for the first time since 1960
- Looking ahead, today sees the release of US housing starts, building permits, potential comments from BoC Governor Poloz, ECB’s Nowotny, Visco and earnings from the world’s largest retailer Wal-Mart at 1200BST/0600CDT.
- Treasuries gain led by long end, following EGBs as ECB’s official Benoit Coeure says central bank intends to increase its purchases of euro-area assets in May and June ahead of an expected low-liquidity period in the summer.
- Germany’s ZEW index of investor expectations fell to 41.9 in May, more than forecast and lowest since Dec., from 53.3 in April
- Britain’s inflation rate fell 0.1%, dropping below zero for the first time in more than half a century, as the drop in food and energy prices depressed the cost of living
- Greek leaders expressed optimism a deal to unlock bailout funds is within reach, in the face of continuing warnings by creditors that the country has yet to comply with the terms of its emergency loans
- ECB, EFSF would not immediately cut support to Greece if it failed to make a scheduled repayment to the IMF, Handelsblatt reported, citing unidentified central bank sources
- Merkel is trying to head off a potential revolt from as much as a third of her bloc’s lawmakers as she tries to up line support for a compromise deal with Greece, party officials said
- China is considering relaxing rules for bond sales in a bid to boost slowing economic growth, people familiar with the matter said Tuesday
- Islamic State’s seizure of the Iraqi city of Ramadi threatens to unravel Obama’s strategy for defeating the Sunni extremist group without sending U.S. ground troops back to Iraq
- About 55k pages of Hillary Clinton’s State Department e-mail would be made public in January 2016 after it undergoes an internal review, the agency said in a court filing
- EU governments will go ahead with planning for a military mission to intercept refugee boats on the high seas or seize and destroy them in Libyan territorial waters -- controversial steps that would require approval by the UN Security Council
- Sovereign bond yields fall. Asian stocks higher, European stocks, U.S. equity-index futures gain. Crude oil, gold, copper lower
US Event Calendar
- 8:30am: Housing Starts, April, est. 1.015m (prior 0.926m)
- Housing starts m/m, April, est. 9.6% (prior 2.0%)
- Building Permits, April, est. 1.064m (prior 1.042m)
- Building Permits m/m, April, est. 2.1% (prior -5.4%)
DB's Jim Reid Concludes the overnight recap
With regards to Greece, various headlines suggesting that both sides are coming close to some sort of agreement continued once again yesterday. Markets had initially got excited after Athens based newspaper To Vima reported that the EU Commission was said to propose a compromise for a deal, suggesting that Greece would receive a partial disbursement of funds in June in return for new targets for fiscal actions and a more lenient primary budget surplus. This was swiftly played down by an EC spokeswoman however who said that she was unaware of the report and that talks are instead continuing to focus on a comprehensive deal. In the meantime, the EC’s Moscovici commented that ‘we have moved closer to common understanding on reforms to be adopted in a number of areas’. The commissioner cited Greece’s value added tax system in particular, which according to Greek press Ekathimerini the Greek government yesterday submitted a reform proposal on to its creditors.
There was a similar trend in comments out of the Greece camp yesterday. Both PM Tsipras and Finance Minister Varoufakis reiterated that Athens will be unwilling to budge from its ‘red lines’. Earlier in the day, Tsipras, despite suggesting that negotiations are in the final stages, commented that an agreement with Greece’s creditors should include debt restructuring, lower primary budget surplus targets and no wage or pension cuts. Varoufakis confirmed much of the PM’s comments, noting that an agreement is ‘a matter of one week’ away and that Greece will not sign any deal which doesn’t include debt restructuring. The Finance Minister then went on to say that Greece will not default and that ‘we walked 2/3rds of the road, it’s time for creditors to walk 1/3rd’.
Away from Greece the other notable news story yesterday centered on a paper published by the San Francisco Fed which reported that the Q1 GDP estimate for the US was depressed due to a statistical anomaly. They suggest that, due to the effects of seasonal adjustments, Q1 GDP actually expanded 1.8% rather than the reported 0.2% (and likely negative post revisions). Despite the official GDP reading published by the Bureau of Economic Analysis being adjusted for seasonal variations, the San Francisco Fed argue that Q1 seasonally adjusted real GDP growth should not be consistently higher or lower than growth in any other quarter and so instead applied a second round of seasonal adjustments to correct the residual seasonality, resulting in the much higher reading. The paper does actually follow on from a similar report produced by the Philadelphia Fed four days ago which argued that the ‘BEA’s seasonal adjustment procedures are not filtering out all the intra-year movements in the data’. This is a theme that DB's Joe LaVorgna has picked up on so it’s not new but it did grab some attention. However aside from employment indicators, data so far in Q2 is struggling to suggest that the US economy is set for a significant rebound - as the Atlanta Fed GDPNow forecast would attest to. Given the host of various first-tier data releases this week (including CPI on Friday), it’s probably fair to say that any calculation methodology arguments will be put to one side for the meantime as the market continues to adjust its rate liftoff date expectations as the data rolls in.
Before we take a look at yesterday’s price action, markets in Asia this morning are generally following the better tone out of the US and trading higher as we type. The Nikkei (+0.79%), Shanghai Comp (+2.72%), Hang Seng (+0.42%) and Kospi (+0.50%) in particular are all trading firmer. Bond yields are also higher across the region, led by 10y yields in Australia (+9.5bps). Treasuries are unchanged as we go to print.
Aside from Greece and the San Francisco Fed paper yesterday, news flow was fairly limited. If you didn’t put the move in bond markets yesterday in perspective with the moves of the last few weeks you’d probably think otherwise however. 10y Bunds (+2.5bps) gave up some of Friday’s gains to close higher in yield yesterday while similar maturity yields in Italy (+12.2bps), Spain (+9.9bps) and Portugal (+12.4bps) took a steep leg higher. The weakness in Europe appeared to filter over into Treasuries as both the 10y (+9.1bps) and 30y (+10.0bps) yields rose to 2.235% and 3.029% respectively. The Dollar pared back some of the weakness last week as the DXY closed +1.17%. Equities marched higher meanwhile as the S&P 500 (+0.30%) once again recorded a fresh record high while in Europe bourses were led by the DAX (+1.29%) while there were also gains for the Stoxx 600 (+0.41%) and CAC (+0.37%). Greek equities (+1.62%) rallied into the close on the back of the To Vima report however both 2y (+311bps) and 10y (+55bps) sold off significantly.
The move higher in Treasury yields came despite more dovish comments from the Chicago Fed’s Evans and weaker than expected housing market data. In terms of the data, the NAHB housing market index print for May came in below expectations at 54 (vs. 57 expected), declining 2pts from April’s reading. The Fed’s Evans meanwhile reiterated his call that the Fed should not raise rates until 2016, based on his expectation that ‘my forecast does not see inflation rising to our 2% target until 2018’. Evans went on to say that it would then be appropriate to raise rates ‘only gradually’ following the first move while reiterating the data dependency behind for the initial move.
It’s a busy day data wise today. We kick off this morning in the UK where we get the April CPI/RPI/PPI prints where we could see the first negative YoY inflation print since 1960. With the recent increase in Oil most will see this as a temporary dip into deflation. We also have the final April inflation reading for the Euro-area (current consensus is for no change to either the headline or the core at 0.0% yoy and +0.6% yoy respectively) as well as trade data for the region and the German ZEW survey reading for May. We’ll get important indicators for Q2 growth in the US this afternoon when we get housing starts and building permits data for April. This will provide early clues as to the magnitude of the growth bounce back. So a relatively busy day!!