After sliding early in Sunday pre-market trade, overnight US equity futures managed to rebound on the now traditional low-volume levitation from a low of 1938 to just over 1950 at last check, ignoring the biggest single-name blowup story this morning which is the 23% collapse in Volkswagen shares in the aftermath of the company's emissions lying scandal which has cost the company €15 billion in market cap and has dragged Germany's Dax lower...
... and instead have piggybacked on what we said was the last Hail Mary for the market: the hope of more QE from either the ECB or the BOJ. Tonight, it was the latter and while Japan's market are closed until Thursday for public holidays, its currency which is the world's preferred carry trade and the primary driver alongside VIX manipulation of the S&P500, has jumped from a low of just over 119 on Friday morning to a high of 120.4, pushing the entire US stock market with it.
As Reuters reported over the weekend, sources suggest that the BoJ is again contemplating an overhaul of its QQE program with an increase in its JPY 80 trillion monetary base as its main option to achieve its inflation goal, adding that it has not ruled out moving away from its money printing program in the long term due to a lack of success in reaching the price goal. "QQE is not a programme intended to last another five, 10 years," said a former BOJ policymaker with knowledge of current monetary policy deliberations.
However, the reason why ultimately any boost to Japan's QE will fail is the same one we first pointed out in late 2014 and then again a few weeks ago: "with borrowing costs near zero, some BOJ officials doubt whether expanding QQE would help the economy much and some worry they might eventually run out of sellers if they accelerate the programme.... "Given the pace of the BOJ's purchases under the QQE program that is under way ... you could run out of willing sellers of JGBs by the end of 2017," said Kalpana Kochhar, the IMF's mission chief for Japan." This is precisely what we warned on September 4, and while we are glad to see the caution making mainstream media, the implications of this realization will surely not be grasped for many months to come.
Elsewhere in Asia, equity markets traded mostly lower following Friday's negative close on Wall Street, where the weakness in the commodity complex pressurised global equities. ASX 200 (-2.0%) underperformed as energy and basic material names dragged the index lower, while Shanghai Comp. (+1.9%) pared its opening weakness led by strength in the industrial sector, as the UK and China met to discuss opportunities for Chinese investment in infrastructure projects. Japanese markets are closed until Thursday due to several public holidays.
In Europe, Volkswagen (-23.0%) shares plunged following the reports that the automaker could face an USD 18 billion fine over the software made to meet clean-air standards during official emissions testing. At the same time, London listed RSA (-21.0%) shares lost over 20% in reaction to the reports that Zurich has pulled its bid for the company because it expects USD 200mln loss on the Chinese Tianjin port explosions last month. Nonetheless, despite the underperformance by the German DAX index (-0.5%), stocks in Europe traded mostly higher (+0.6%), with utilities and healthcare names leading the move higher.
The upside, albeit restrained, meant that both Bunds and Gilts traded lower, with Portuguese bonds outperforming their EU counterparts in reaction to Friday's upgrade by S&P. This week will see supply slip to EUR 9bIn from the near EUR 15 billion seen last week, while in terms of redemptions, participants will have to wait until next week when things begin to pick up on this front.
In FX, the key driver was the previously mentioned JPY weakness which was observed across the board following reports citing sources that the BoJ is to contemplate an overhaul of its QQE program with an increase in its JPY 80trl monetary base as its main option to achieve its inflation goal, while elsewhere the USD remained relatively flat (USD-index: +0.1%). At the same time, analysts at Goldman Sachs believe there is scope for further EUR weakness as the ECB will most likely press ahead and increase its QE program to meet its inflation target.
In short: with the Fed out of the picture, the hope is that either the BOJ or the ECB can muster some further monetization especially with China Quantitative Tightening, or suddenly the global bull case for the past 7 years falls apart.
In commodities, gold traded relatively flat overnight and remained close to its best levels in 3 weeks, as the precious metal held onto most of last week's FOMC-inspired gains. Elsewhere, copper prices declined to 2-week lows, while iron ore also saw mild pressure and zinc fell by around 3% as concerns over weakening Chinese demand continue. In terms of the energy complex, WTI and Brent futures both head into the North American crossover in positive territory, above USD 45.00 and USD 48.00 respectively to pare back all of last week's FOMC inspired losses.
Today's US calendar is light with just the NAR's conflicted existing home sales report on the docket; the central bank arena is more active with comments from ECB's Coeure, Nowotny, Praet and Hansson and also Fed's Lockhart and Bullard on deck.
Bulletin Headline Summary from Bloomberg and RanSquawk
- Despite the underperformance by the German DAX index after Volkswagen saw sharp losses, stocks in Europe traded mostly in the green, with utilities and healthcare names leading the move higher
- JPY weakness was observed across the board following reports citing sources that the BoJ is to contemplate an overhaul of its QQE program with an increase in its JPY 80trl monetary base
- Today's highlights include the latest US existing home sales report, as well as any comments from ECB's Coeure, Nowotny, Praet and Hansson and also Fed's Lockhart and Bullard.Treasuries decline to open the week with 2Y/5Y/7Y auctions scheduled to start tomorrow, ECB’s quarterly hearing on Wednesday, U.S. GDP on Friday.
- China’s economy isn’t as weak as it may look, according to a private survey from a New York-based research group that says it’s a myth the nation’s slowdown is intensifying
- Richmond Fed’s Jeffrey Lacker, an outspoken anti-inflation hawk who dissented in favor of higher rates at the Fed’s policy meeting on Thursday, said failing to tighten had raised the risk of “adverse outcomes” for the nation
- San Francisco Fed’s John Williams said the central bank’s decision this week to keep rates near zero was a close one, and reiterated that he expects an increase in 2015
- Economists see it as increasingly likely that the ECB will be called on its pledge to boost its EU1.1t bond-buying program if needed amid stubbornly low inflation; Goldman says euro may fall up to 10 U.S. cents
- Alexis Tsipras and his Syriza coalition emerged from a second election in eight months with a level of support barely diminished from the emphatic victory that catapulted him both into power and a standoff with the euro region
- Sentiment toward stocks is plunging at a historic rate, falling by some measures at the fastest pace since Volcker had just finished pushing up interest rates in the 1980s
- Sovereign 10Y bond yields mixed. Asian stocks decline, U.S. equity-index futures gain. Crude oil and copper higher, gold lower
US Event Calendar
- 10:00am: Existing Home Sales, Aug., est. 5.5m (prior 5.59m); Existing Home Sales m/m, Aug., est. -1.6% (prior 2%)
- 1:00pm: Fed’s Lockhart speaks in Atlanta
- 2:30pm: Bank of Canada’s Poloz speaks in Calgary
DB concludes the weekend news roundup
With a fairly light data-docket ahead of us for the next five days, markets look set to remain on edge in the aftermath of last Thursday’s Fed decision and Yellen verdict. The highlights look set to be the final Q2 GDP reading and durable goods data but it’s Fedspeak that will be closely watched however with Lockhart, Bullard and George all due to make various appearances over the next five days while Fed Chair Yellen is due to deliver a lecture on Thursday. The usual full run-down is at the end of this morning’s report. Markets certainly need some soothing at the moment after Friday’s price action saw a continuation of the post FOMC fallout. The S&P 500 tumbled 1.62% and is now 3.1% off the pre-Yellen press conference highs. 10y Treasury yields fell another 5.7bps and are now 16bps down from the highs just before the FOMC decision. European rates markets, playing catch-up, also saw a decent leg lower across the board with the majority of markets down 12 to 16bps.
We haven’t had to wait too long for the first Fed official comments however with Williams, Bullard and Lacker all speaking over the weekend. San Francisco Fed President Williams, seen as a centrist in the Fed camp and a voter this year, said that last week’s decision was a close call and that there were arguments on the side of the ledger arguing for more patience. Williams did however go on to say that ‘I view the next appropriate step as gradually raising interest rates, most likely starting sometime later this year’. Another voter this year, the more hawkish Richmond Fed President Lacker who dissented on Thursday said that exceptionally low real interest rates are unlikely to be appropriate for an economy with persistently strong consumption growth and tightening labour markets and that such ‘departures are risky and raise the likelihood of adverse outcomes’. Adding to the hawkish rhetoric was St Louis Fed President Bullard, a voter next year and who said that he argued against the decision to hold at last week’s meeting and that the decision has ‘created rather than reduced global macroeconomic uncertainty’. Bullard believes that the Fed is ‘ready to go’ next month should conditions warrant.
That takes us to the latest in markets this morning where equity bourses in Asia have largely followed the lead from the US on Friday to kick start the week on the back foot. The Hang Seng (-1.30%), Kospi (-1.60%) and ASX (-2.63%) have seen decent legs lower while markets in Japan are closed, although mainland bourses in China have rebounded following an initial plunge at the open. The Shanghai Comp is +0.67% at the break after opening over a percent down, while the CSI 300 is +0.61%. That’s despite some disappointing business conditions data this morning out of China, with overall business conditions falling 4.7pts in September to 51.3, while future expectations have fallen to their lowest level since 2007. Credit markets are weaker this morning, with indices in Asia and Australia around 3bps wider. Meanwhile, US equity market futures are pointing towards another soft start, down around half a percent.
The other news story from the last 48 hours has been over in Greece where the General Election results are in. With 99.5% of the votes counted for, Syriza have secured a larger than expected victory with 35.5% of the votes, ahead of New Democracy at 28.1%. The victory means Syriza are set to secure 145 seats, with ND at 75 seats. A coalition with current partners the Independent Greeks (who received 3.7% of the votes) looks set to remain in place with a majority total of 155 seats. Meanwhile the Popular Unity party, formed by Syriza rebels, looks set to fail to garner enough votes to market it into parliament. DB’s resident Greek expert George Saravelos notes that the election outcome therefore represents a re-affirmation of the prior political status quo with one key difference: a strong political endorsement of Tsipras’ decision to compromise with European creditors and maintain Greece’s Eurozone membership. George notes that with the Syriza parliamentary group now consisting of more moderate MP’s and the vast majority of opposition parties also in support of European compromise, the election is now likely to mark a period of political stability in Greece. In the coming days, appointments to key ministry posts will be made, before negotiations commence. A final set of prior actions to be passed through parliament sill need to be agreed with creditors to disburse the last sub-tranche of the first installment of funding, following which the first full program review can begin late next month. A potential successful conclusion of the first program review would open the door for the provision of additional debt relief to Greece, although this won’t come before the outstanding issues around pension and collective wage bargaining in particular are resolved. Importantly however, with Tsipras gaining the political endorsement to compromise with Europe, continued progress in coming months on program implementation should be possible.
Back to the rest of markets on Friday. Despite the bull flattening across the Treasury curve (30y yields -7.0bps, 2y yields -0.2bps), the US Dollar actually had a decent session with the Dollar index closing up +0.33%, surging over a percent off the day’s lows. Credit weakened albeit in choppy trading with CDX IG (+1.5bps) eventually widening into the close with primary issuance largely grinding to a halt. The risk-off sentiment was reflected through the commodity complex where we saw Oil sell-off (WTI -4.73%, Brent -3.28%) along with Copper (-2.52%), while Gold (+0.68%) saw a decent bid. Prior to this European equity markets had tumbled with the Stoxx 600 closing down 1.78% and most major DM markets down 2-3%.
With little in the way of data other just a weaker than expected US Conference Board leading index for the month of August (+0.1% mom vs. +0.2%), the focus was instead on some of the various Central Bank speakers we heard from on Friday. The ECB’s Coeure said that the Fed’s decision to leave rates on hold ‘is a confirmation of our diagnoses of the existence of risks in the global economy’. Meanwhile, his fellow board member, Praet, said that the ‘we share the concerns about the outlook for the global economy’. Praet went on to emphasize that the ECB won’t hesitate to act if they came to the conclusion that the shocks are so severe and long-lasting that they would lead to a lower inflation forecast for the euro area. Over at the BoE meanwhile, the Bank’s Chief Economist Andy Haldane warned that the case of the UK raising rates is ‘some way from being made’. Haldane noted that the balance of risks to UK growth and inflation at the two-year horizon is skewed ‘squarely and significantly to the downside’.