Almost two weeks after we explained why any hope for a QQE boost by the BOJ is a myth, and that any increase in monetization will simply lead to a faster tapering and ultimately halt of Kuroda's bond purchases...
... the market finally grasped this, when overnight the BOJ not only did not easy further as some - certainly the USDJPY - had expected, but kept its QE at the JPY80 trillion level and failed to offer any hints of further easing that many had hoped for, pushing the Nikkei down from up almost 400 point intraday to virtually unchanged and sending the USDJPY back under 120. JGBs also traded lower on concerns there may not be much more QE to frontrun.
As Bloomberg reports, "the move by Governor Haruhiko Kuroda and his colleagues leaves the onus on Prime Minister Shinzo Abe’s government to compile a stimulus package to boost what evidence indicates is a lackluster recovery in the second half of the year so far. Kuroda repeatedly told reporters on Tuesday that the bank sees a gradual recovery continuing in the economy." Which is ironic considering many now see Japan's GDP sliding in Q3 confirming the 5th recession in the past 8 years.
Still, the "experts" continue calling for further bailouts: economists from Goldman Sachs Group Inc. and Citigroup Inc. are among those who project a boost in stimulus on Oct. 30. “If the downside risks worsen the BOJ will need to take action,” said Yasuhiro Takahashi, an economist at Nomura Holdings Inc. who forecasts further stimulus in April. “The BOJ had been optimistic about the outlook for Japan’s economy but in today’s statement it lowered its view on exports and production.”
Good luck: soon the realization that a supply constrained world is the biggest nightmare for central banks is the biggest story will dawn but not for another 6-9 months as we previewed ten days ago.
What, however, is dawning right now on traders is that China has once again lost control of its market, and days after crushing index futures trading by hiking margins to unprecedented levels, the SHCOMP resumed its old acrobatics tumbling as much as 4.2% in final hour of trading, and dropping below 3,000 for the first time since Aug. 27, before closing 3.5% lower at 3,005.172.
The good news: the plunge protection team held 3000, just barely. The bad news: the drop was the biggest since August 25 and follows yesterday's 2.7% fall, dragging the decline 2015 back to 7.1%.
However, what's even worse this time is that unlike before, the plunge was on very low volume with trading ~53% below 100-day avg. If the National Team can't contain this it may as well resign.
Other indices fares just as badly: CSI 300 -3.9%; ChiNext -5.7% to lowest in 7 months."Investor confidence deteriorated following the decline yesterday and the index fell further in the absence of rebound momentum in the market. It’s a vicious cycle,” Shenwan Hongyuan Group analyst Qian Qimin says by phone, adding that "sentiment still an important factor moving stocks." That and central bank buying of course.
Asian weakness has for now not spilled over across to Europe and the Atlantic: for the second day running, market participants largely disregarded the cautious sentiment which dominated the price action over in Asia amid the ongoing concerns regarding China and after the BoJ refrained from easing its monetary policy further to kick off the session in the green, before falling into negative territory during the European morning (Euro Stoxx: -0.3%).
The biggest news in Europe today was Germany's ZEW Investor Confidence which tumbled for a six month in September to 12.1, from 25 in August, and well below the 18.3 expected. Surely, this was as good a reason as any to send the DAX into overdrive moments ago: the market may be realizing that the BOJ's QE expansion is limited, but it still has a long way to go before grasping the same about the ECB, as such Mario Draghi may now be the market's only hope for more bailouts.
In spite of the recent upside by EU equities, gains have been led by health care and other defensive based sectors. At the same time, materials sector underperformed, in reaction to lower base metal prices and also as market participants used yesterday's gains to book profits and in turn saw commodities giant Glencore (-5.0%) trade at record lows. It's time for Doomsday 2.0 scenario for Mr. Glasenberg.
As a result, the FTSE-100 index (-0.6%) underperformed since the open, while pharma heavy CAC outperformed.
Bunds have remain in negative territory throughout the European morning , with tomorrow set for first major batch of supply of the week, as Germany is set to come to market with their longer-duration Bund offering before Spain and France enter the market on Thursday.
In FX, the JPY strengthened across the board, with shorter-dated JPY swap tenors rising to late August levels as bets of IOER cut and further easing were unwound after the BoJ kept the policy mix unchanged . While elsewhere AUD failed to hold onto early gains following the release of the RBA September minutes, where the central bank kept the door open for a rate cut as it stated that it will observe incoming data in determining whether policy is appropriate.
In terms of the European session, UK CPI data saw upside in GBP after avoiding falling into deflationary territory (Y/Y 0.0% vs. Exp. 0.0%), while RPI printed higher than expected (Y/Y 1.10% vs. Exp. 0.90%) . In terms of mainland Europe, the German ZEW survey saw mixed results and as such failed to have a notable effect on any major EU asset class.
In commodities, Both WTI and Brent futures trade in modest positive territory heading into the NYMEX pit open amid relatively light newsflow, with the commodity bolstered by modest weakness in USD . Elsewhere metals have seen some weakness today, weighing on commodity names to see Glencore reach all time lows. Looking ahead today sees the release of the API crude oil inventories, with last week showing a build of 2100k, also of note, there is a Brent Oct'15 futures due to expire at 1930BST/1330CDT.
Overnight Media Digest
- European market participants initially disregarded the cautious sentiment which dominated the price action in Asia to see stocks kick off in the green, before falling into negative territory during the European morning
- JPY has strengthened across the board, with shorter-dated JPY swap tenors rising to late August levels as bets of IOER cut and further easing were unwound after the BoJ kept the policy mix unchanged
- Highlights today include retail sales advance, empire manufacturing and industrial production
- Treasuries gain amid losses in Chinese stocks on growth concerns; European stocks also lower as German investor confidence falls for a sixth month in Sept., declining to 12.1 (est. 18.3) from 25 in August.
- Markets likely to remain rangebound before FOMC decision Thursday; economists/analysts remain split on prospect of 1st rate increase in more than 9 yrs, based on published research
- The Bank of Japan refrained from boosting stimulus even after the economy shrank last quarter, betting that a resumption in growth will be enough to rekindle inflation
- U.K. inflation returned to zero in August, driven down by the cost of motor fuel and clothing. A measure of core price pressures also eased
- Top leaders from China’s Communist Party recently consulted former premier Zhu Rongji for his thoughts on President Xi Jinping’s plan for overhauling the country’s $16t state-run sector, according to people with knowledge of the matter
- The last time China launched such a shakeup, the charge was led by Zhu: Some 60,000 firms were closed and 40m workers let go, according to government data
- Sovereign 10Y bond yields mostly higher. Asian stocks lower, European stocks and U.S. equity-index futures decline. Crude oil higher, gold and copper lower
US Event Calendar
- 8:30am: Retail Sales Advance, Aug., est. 0.3% (prior 0.6%)
- Retail Sales Ex Auto, Aug., est. 0.2% (prior 0.4%)
- Retail Sales Ex Auto and Gas, Aug., est. 0.4% (prior 0.4%)
- Retail Sales Control Group, Aug., est. 0.3% (prior 0.3%) ** 8:30am: Empire Manufacturing, Sept., est. -0.50 (prior -14.92)
- 9:15am: Industrial Production, Aug., est. -0.2% (prior 0.6%)
- Capacity Utilization, Aug., est. 77.8% (prior 78%)
- Manufacturing (SIC) Production, Aug., est. -0.3% (prior 0.8%)
- 10:00am: Business Inventories, July, est. 0.1% (prior 0.8%)
- 11:30am: U.S. to auction $20b 1Y bills, $20b 4W bills
DB's Jim Reid completes the overnight wrap
We start this morning in Japan where the BoJ has left its monetary policy stance and monetary base target unchanged with for now is in line with Bloomberg's consensus poll. The BoJ expects the economy to continue to recover moderately but acknowledges that exports and production have been affected by the slowdown in Emerging Markets. The JPY is a touch stronger against the dollar at 120.08, the Nikkei is off its intraday highs but still 0.6% up on the day, the 10yr JGB yield is about 1.5bp higher on the day. All eyes will be on Kuroda's press briefing later at around 7.30am UK time. Will he hint that recent China/EM woes are pushing the BoJ towards further easing? Like with the ECB we think there's a high likelihood they'll eventually be forced into doing more.
Away from Japan, investors were mostly on the back foot overnight with our screens showing the Hang Seng, Shanghai Composite and ASX 200 are down -0.3%, -2.5% and -1.2%, respectively as we go to print. Asian equities are perhaps taking cues from the softer risk session in the US overnight.
Talking of the US, whilst risk assets were generally lower trading volumes (at least on the equity side) were on the low side. Total NYSE trading volumes were the lowest in about 4 weeks which in some ways shows how busy the latter half of August was. There was a perhaps some calm ahead of the Fed storm on Thursday but investors were also staying on the sidelines given there was the Rosh Hashanah holiday and a ‘lack of US data’ Monday. The S&P 500 finished 0.41% lower on the day led by declines in 9 out of the 10 key sector groups (only Utilities finished touch higher). Energy (-0.8%) and Materials (-1.3%) suffered the most not helped by the weakness in commodities. Brent and WTI fell -3.7% and -1.4% to around US$46/bbl and US$44/bbl, respectively.
Copper lost around 2% as sentiment was somewhat affected by the softer-than-expected FAI data from China over the weekend even though Copper is now 7% off its lows of about 3 weeks ago. Perhaps Glencore’s move to shut down production may provide some base support. Elsewhere the broader CRB commodity index finished about half a percent lower on the day.
Amid the risk off tone credit continued to hold in relatively well which is impressive given the recent supply. Primary markets were reasonably active with nearly US$5bn in new issues (across 9 tranches) being priced in the US session yesterday. Our US colleagues noted that accounts continued to remain engaged in new issues with order books around 3x oversubscribed on average. Secondary credit spreads were also unchanged to a touch wider with TRACE data showing that dealers were net sellers of bonds yesterday. US 10yr Treasuries were little changed at around 2.18%. Fed Fund futures implied probability of a Fed liftoff stands at around 28% and has been steady now for a few days.
On the other side of the pond, it was a relatively weak European session yesterday with equities down around -0.5% across the board largely on the back of a weak open following on from Asia. Credit widened with Xover moving +4bps with government bonds closing the day flat outside of the Periphery which saw some widening (e.g. Portugal +5bps, Greece +9bps). Looking at yesterday’s data the main release was the Eurozone July IP which came in noticeably better than expected (+0.6% MoM vs +0.3% expected and -0.4% previous read).
Looking to the day ahead after Kuroda's press conference it’s set to be a busy day on the data front. In Europe we have the French August inflation print (expected in at +0.2% YoY), UK inflation (expected in at 0% YoY), the July Eurozone trade balance (expected to fall slightly to +€21.4bn) and finally the September German ZEW survey which is expected to weaken. However given the approaching FOMC meeting much of the focus today will likely be on the US data. We have August retail sales (with the MoM growth rate expected to slip to +0.3%), September Empire manufacturing which is expected to rebound from its big drop in August although remain in negative territory and also August IP which is expected to slip into negative territory.