Yesterday morning, when previewing the day's tumultuous events, we said that "Futures Are Firm On Hope Draghi Will Give Green Light To BTFD." And boy did Draghi give a green light, that and then some, when his press conference unleashed one of the biggest one-day US equity rallies in 2015. However we also said that Draghi "faces the paradox of reflexivity": how does he intervene and demonstrate he is readier than ever to set up stimulus, without panicking investors over euro area’s health because remember: more ECB intervention means Europe's economy is once again far weaker than consensus admits.
We got the answer to that too when Draghi did absolutely nothing, but merely jawboned to a level unseen since his infamous "whatever it takes" speech in July 2012, sending the EURUSD down by 250 pips on the day on nothing but more cajoling and hints of both boosting or extending QE as well as hinting at NIRP.
And thanks to reflexivity, now that Draghi has achieved his FX goal of pushing EURUSD to the ECB's stated Euro forecast ceiling of 1.10, he no longer even has to do anything, and most likely won't in December when the market expects the ECB to unleash savers' hell. Golf clap.
Confirming that central banks are far more eager to talk than to actually do anything, were comments overnight from that "other" country which is expected to boost QE, Japan, where Etsuro Honda, adviser to Japanese PM Shinzo Abe, said that "immediate additional easing by Bank of Japan is not necessary", Kyodo reports, citing an interview. Honda says if BOJ carried out additional easing it could be to increase annual JGB purchases to 100t yen from 80t yen; says “next additional easing would be last one.” Of note was his claim that economic measures to aid low income workers was needed due to weak individual consumption; and that fiscal measures are more effective than monetary easing.
Indeed, with the USDJPY surging overnight to 121 on Draghi's comments, if not actions, suddenly the BOJ too has far less of a reason to act. And, as expected, the USDJPY promptly tumbled down to 120.20 once it became clear that the BOJ, just like the ECB, was merely talking and has no intention to actually act.
Which is why we would not be at all surprised to see absolutely nothing from either the BOJ next Friday, or from the ECB on December 3 - after all the bulk of the FX intervention already took place, and the S&P500 has ramped to just shy of its all time highs once again.
And in fact, following overnight's glowing PMI data out of Europe, we would also not be at all surprised if Draghi won't back off entirely from his uber-bearish commentary at the next public statement opportunity he gets, launching a rocket under the EURUSD.
Overnight Marketi reported Euro area flash composite PMI which surprisingly rose 0.4pt to 54.0 in October. This was stronger than consensus expectations of a moderate decline to 53.4. The manufacturing sector PMI was flat at 52.0 (Cons. 51.7), while the services sector PMI increased 0.5pt to 54.2 (Cons. 53.5). At the country level, the German and the French composite PMI made similar robust gains.
The breakdown was mixed. Within the manufacturing PMI, new orders edged down 0.1pt, while stocks of finished goods rose 0.8pt, leading to a 1.0pt reduction in the order-stock difference. Among other subcomponents of the manufacturing PMI, output and employment fell (-0.2pt to 53.3 and -0.6pt to 50.9, respectively). More positively, in services, the forward-looking subcomponents (which are not part of the headline services PMI figure) showed 'incoming new business' rising from 53.6 to 54.1, while 'business expectations' fell from a high level (-1.2pt to 61.0).
The German composite PMI rose in a similar fashion to the area-wide improvement (+0.5pt to 54.5), reflecting an increase in the services PMI (+1.1pt to 55.2), while the manufacturing PMI fell (-0.6pt to 51.6). The French composite PMI showed similar developments in October (+0.4pt to 52.3), with gains both in the services PMI (+0.4pt to 52.3) and the manufacturing PMI, even if very moderate (+0.1pt to 50.7).
A quick walk through the markets reveals that Asian stocks traded higher in conjunction with gains seen in its global counterparts after ECB President Draghi's dovish comments. Nikkei 225 (+2.1%) outperformed amid broad based gains with USD/JPY remaining near yesterday's highs supporting exporters, while ASX 200 (+1.7%) was underpinned by mining names and large banks after NAB and ANZ followed both Westpac and Commonwealth Bank in raising mortgage rates. China's Shanghai Comp. (+1.3%) benefitted from better property figures, margin debt reaching 6-week highs and reports that China is to increase the amount of funds available to local governments by 100% for infrastructure projects, as an improvement in the property sector is seen to dampen demand for stocks. JGBs tracked Bunds and USTs higher with the paper also supported by the BoJ entering the market to purchase JPY 1.2trl in 1-10yr bonds.
An interesting data point out of China was that September New Home Prices rose in 39 cities vs. 35 in August and in 12 cities Y/Y vs. 9 in August. This was the first time Chinese home prices rose in more than half of 70 major cities in 17 months, driven by mortgage restrictions easing and PBOC rate cuts.
It is very possible that now that China is once again reflating its housing bubble it may allow the stock bubble, which was merely an interim step to hold the economy over for a period of time, to fully burst.
The final European session of the week has kicked off with sentiment continuing on from yesterday as markets continue to digest the dovish press conference from ECB's Draghi. As such equities (Euro Stoxx: +1.2%) bolstered this morning, while fixed income products experienced initial strength to see yields reach lows across Europe as Italian and Spanish 2y yields go negative for first time, joining German, French, Austrian,
Dutch and Finnish 2yr yields, before Bunds retraced their gains later in the session. While over in equity markets, price action has been bolstered through German automakers (Daimler: 2.0%), who have seen upside today on the back of the weaker EUR.
In FX, EUR/USD spent much of the overnight session trading around the 1.1100 handle after yesterday's sharp losses, with EUR seeing modest gains ahead of the North American crossover to par some of yesterday's losses , with sentiment supported by generally better than expected manufacturing and services PMI from France, Germany and the Eurozone (Eurozone Manufacturing PMI 52.0 vs. Exp. 51.). Elsewhere, USD-index (-0.3%) resides in negative territory, weighed on by JPY strength on the back of comments from Japan PM adviser Honda who stated that there is no need for additional easing by the BoJ at this stage.
Of note, as well as initial weakness in EUR, the dovish comments also saw a bout of carry trade and supported countries with higher yields with NZD/USD breaking above 0.6800, coinciding with AUD/NZD retreating below 1.0600. AUD/USD was stronger, although did see some mild paring after NAB and ANZ increased home loan rates, which put pressure for the RBA to act at the November meeting.
Gold prices saw mild support overnight following yesterday's dovish ECB press conference, although gains were capped by USD strength, however the European morning saw gold move higher, breaking out of its overnight range and eyeing its 200DMA to the upside at USD 1174.59, benefitting from the aforementioned weaker USD. Elsewhere copper and iron ore prices saw mild weakness with the latter near 3-month lows and on course for a 5th weekly loss in 6 weeks, while aluminium prices extended on declines to print its weakest level since 2009. In the commodity complex. WTI and Brent futures both head into US hours modestly higher on the back of USD softness and amid relatively light nesflow.
Looking ahead, highlights include Canadian CPI and US manufacturing PMI. Following yesterday's tech earnings barrage, today we get P&G, Altera, LyondellBasell Industries, State Street, VF and Ventas.
- S&P 500 futures up 0.2% to 2057
- Stoxx 600 up 1% to 374
- FTSE 100 up 0.8% to 6425
- DAX up 1.4% to 10639
- S&P GSCI Index up 0.5% to 361.7
- MSCI Asia Pacific up 1.7% to 136
- Nikkei 225 up 2.1% to 18825
- Hang Seng up 1.3% to 23152
- Shanghai Composite up 1.3% to 3412
- S&P/ASX 200 up 1.7% to 5352
- US 10-yr yield up 2bps to 2.05%
- Dollar Index down 0.2% to 96.18
- WTI Crude futures up 0.3% to $45.53
- Brent Futures up 0.7% to $48.41
- Gold spot up 0.6% to $1,173
- German 10Yr yield up 1bp to 0.51%
- Italian 10Yr yield up 2bps to 1.47%
- Spanish 10Yr yield up 2bps to 1.62%
Bulletin Headline Summary from Bloomberg and RanSquawk
- The final European session of the week has kicked off with sentiment continuing on from yesterday as markets continue to digest the dovish press conference from ECB's Draghi
- USD-index resides in negative territory, weighed on by JPY strength on the back of comments from Japan PM adviser Honda who stated that there is no need for additional easing by the BoJ at this stage
- Looking ahead, highlights include Canadian CPI, US manufacturing PM! as well a host of US earnings including P&G, Altera and LyondellBasell Industries
- Falling Prices Meet Weakening Growth as ECB Prepares for Action: While a PMI for manufacturing and services unexpectedly rose to 54 in Oct. from 53.6 in Sept., forward- looking indicators point to a risk of a slowdown, Markit said
- Treasuries decline as global stocks and commodities extend rally sparked by prospect of more QE from the ECB.
- BOJ Said to See Output Data as Crucial Before Policy Meeting: Sept. industrial production data due a day before the policy board meets on Oct. 30 to consider adjusting monetary stimulus
- While Markit’s euro-area PMI increased to 54 in October from 53.6 the previous month, forward-looking indicators point to a risk of a slowdown, with service-sector expectations for the year ahead fell to a 10-month low
- Jack Dorsey Gives a Third of His Twitter Stock Back to Employees: Shares amount to 1% of the co., worth ~$200m
- A.P. Moeller-Maersk cut its 2015 profit forecast to ~$3.4b vs previous expectations for $4b, citing weaker container shipping market as the outlook for global growth becomes gloomier
- With oil prices still wobbling around $50, Norway is in danger of a recession that could drive its benchmark interest rates, already at a record low, to zero
- China’s home prices rose in September in more than half of the 70 major cities monitored by the government for the first time in 17 months, as home-purchase restrictions were loosened and interest rates cut
- The towns that became synonymous with Volkswagen AG’s rise to the pinnacle of the auto industry are feeling the pinch of the diesel-emissions scandal, freezing spending on projects such as playgrounds amid the carmaker’s abrupt fall from grace
- Merkel is signaling to Putin that she’ll stand firm on defending Ukraine, even at the risk of denying herself a possible ally in stemming Europe’s refugee crisis
- Sovereign 10Y bond yields mixed. Asian and European stocks gain, U.S. equity-index futures rise. Crude oil, copper and gold higher
US Event Calendar
- 9:45am: Markit U.S. Mfg PMI, Oct. (P), est. 52.7 (prior 53.1)
DB's Jim Reid completes the overnight recap
With the new James Bond film opening on Monday and continuing the film theme in the EMR this week I felt I had to share my own personal Bond anecdote. In 1998 I lived in Wapping and walked to work in Canary Wharf by a canal. One day I walked home to find a new small boat house installed alongside the canal with canoes in it and London Canoe Club painted on the entrance. I was quite excited and made a note that I was going to come back at the weekend to join the new club. Not that I had ever done it before but I was still at an age where trying new things once was still exciting! I didn't go back past for a couple of days as I was travelling but on my return at the weekend the boats and clubhouse were completely gone with no trace they ever existed. Part of me thought I'd gone crazy and part of me wondered whether there wasn't enough interest and they had decided against setting up there. I therefore regretted not joining immediately. I thought little of it for the next year and then I went to the cinema to see "The World is Not Enough". Imagine my surprise when in the movie James Bond drove a speedboat at high speed into the London Canoe Club sending boats and the building scattered everywhere. Only then did I realise what had happened.
Yesterday Mario Draghi gave the financial community licence to be thrilled as he ended up shaking and stirring markets with the Stoxx 600 (+2.03%) closing at a 2-month high. It’s been pretty obvious to us that with inflation so low, the ECB and BoJ have plenty of excuse to give the plates another big spin and expand current monetary policy further and thus give assets another dose of supportive fairy dust. Whilst we didn't expect action yesterday from the ECB its fair to say we got more certainty than we would have expected that the December 3rd meeting is set to yield more stimulus. As a result our economists have amended their QE extension call and included a small (10bps) further deposit rate cut into their forecasts. They think such a small cut might now risk market disappointment but this will be compensated by signalling that the lower bound has not yet been reached.
Digging deeper into Draghi’s comments. Concerns over growth prospects in emerging markets, as well as possible repercussions for the economy from developments in financial and commodity markets were well flagged as downside risks for the outlook for growth and inflation for the Euro area. On inflation, Draghi warned that ‘most notably, the strength and persistence of the factors that are currently slowing the return of inflation to levels below, but close to, 2% in the medium term require thorough analysis’.
With this, Draghi said that ‘the degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting’. Also ‘the Governing Council is willing and able to act by using all the instruments available within its mandate’ and that in particular ‘the asset purchase programme provides sufficient flexibility in terms of adjusting its size, composition and duration’. Interestingly and as highlighted by our European economists, Draghi also used his predecessor code word ‘vigilance’ that previously had used to signal imminent action.
European equity markets were up across the board. The DAX (+2.48%), CAC (+2.28%), IBEX (+2.05%) and FTSE MIB (+2.00%) all with gains of at least 2%. Unsurprisingly the Euro was heavy hit and finished down 2.03% against the Dollar, the lowest closing level since August 18th. Credit markets got a boost with Crossover and Main 14bps and 4bps tighter respectively. Meanwhile European sovereign bond yields marched lower. Peripherals were the relative outperformer with 10y yields in Italy, Spain and Portugal dropping 15.6bps, 15.6bps and 12.7bps respectively. 10y Bunds ended the session down 7.3bps at 0.494%, the lowest yield since May 29th. There were some decent moves at the shorter end of the curve too. Having declined over 6bps, 2y Bund yields finished down at -0.320% and the lowest level on record, while the Bund curve has moved back into negative territory again up to 6yrs in maturity.
Draghi’s comments helped boost equity markets across the pond too. The S&P 500 closed up +1.66% while the Dow and Nasdaq ended +1.87% and +1.65% despite some more weakness in the healthcare space after Valeant fell another 7%. Some productive earnings reports also helped much of the better tone in the US. After reporting post the closing bell on Wednesday, EBay surged 14% yesterday. Meanwhile, during the day investors were also buoyed by earnings beats for McDonalds (+8%), Dow Chemical (+5%) and 3M (+4%) during the session. Better news was to come after the close however with some material beats from a few bellwethers in the tech space. Microsoft shares surged to a 15-year high in extending trading after earnings came in above expectations, bouncing back strongly from one of its worst losses in history last quarter. Amazon shares jumped as much as 11% after the close, notching a beat in both earnings and sales for the quarter after some robust performance in its cloud-computing division. Finally Google parent company Alphabet was also up double digits in extended trading after beating profit expectations and announcing the group’s first share buyback.
Updating our beat/miss monitor then, yesterday saw 45 S&P 500 companies release results with 34 (76%) reporting a beat in earnings but just 19 (42%) beating at the top-line. While yesterday’s beat ratio in earnings was a touch better than what we’ve seen this earnings season so far (75%), the trend in beats for the top-line was slightly worse than the overall trend so far, currently sitting at 45%. It’s quite clear from the earnings season so far that revenues are struggling more than EPS relative to expectations. This has been the case for many quarters now but seems to be especially so this season.
Just staying on earnings, Caterpillar’s numbers are always worth keeping an eye on with regards to insights in global demand and commodity and investment cycles. Earnings came in a tad below expectations with revenue declines across construction and resources industries. Regionally the biggest declines were in Latin America and Asia Pacific, with mention of declining demand out of China. The company’s outlook was mixed. Profit guidance was revised down for 2015, while revenues are expected to decline 5%. The company did however suggest that they expect world economic growth to be up next year, from 2.4% this year to 2.8% in 2016 with growth in the US and Europe offsetting slower growth in China and Russia. They do however expect key commodity prices to remain largely unchanged.
The prospect of more ECB stimulus is supporting a decent session in Asia this morning. The Nikkei (+2.20%), Hang Seng (+1.34%), Kospi (+0.79%) and ASX (+1.67%) have all moved higher. Markets in Korea have also been buoyed by better than expected GDP data this morning. Credit markets have rallied strongly. Asia and Australia iTraxx indices are 5bps and 4.5bps tighter respectively. EM FX is off to a flyer too. In particular, currencies in Malaysia, Korea and Indonesia are up over a percent in early trading. Meanwhile, equity bourses in China are seemingly trading to their own beat. Both the Shanghai Comp (+0.02%) and CSI 300 (+0.00%) are little moved, but the Shenzhen (+0.93%) has seen a decent gain. September house price data in China showed prices were up in 39 cities last month (out of 70) versus August. This is the first time in 17 month prices have risen in more than half of Chinese cities. This compared to the previous two months when house prices rose in 35 cities in August and 31 cities in July. Elsewhere, S&P 500 (+0.2%) and Nasdaq (+0.4%) futures are pointing towards to decent start post last night’s earnings.
Just wrapping up yesterday, economic data was relatively mixed on the whole in the US. Initial jobless rose 3k to 259k (vs. 265k expected) last week. The Conference Board’s leading index was down a slightly softer than expected -0.2% mom (vs. -0.1% expected) last month. There was some improvement in the Kansas City Fed’s manufacturing activity index during October however, rising 7pts to -1 (vs. -9 expected) and to the highest level since February. The Chicago Fed’s national activity index was a touch below market (-0.37 vs. -0.29 expected), albeit more or less in line with last month. Meanwhile, on the housing front existing home sales were up a robust +4.7% mom (vs. +1.5% expected) in September, the annualized rate of 5.55m just below the 8-year high of July.
Prior to this in Europe, French business confidence rose 1pt to 101 (vs. 100 expected) in October, while an indicator of manufacturing confidence was a touch softer relative to last month. UK retail sales data was supportive. Excluding autos, retail sales rose +1.7% mom in September (vs. +0.4% expected) helping to lift the YoY rate to +5.9%.
Onto today’s calendar now. Economic data today is dominated by the release of the October flash PMI’s where we’ll get the manufacturing, services and composite readings for the Euro area, France and Germany and the manufacturing print in the US this afternoon. With no Fedspeak scheduled again today, corporate earnings will again be closely watched with 10 S&P 500 companies due to release results, including Procter & Gamble and American Airlines (both due before the open). 16 Stoxx 600 companies will report also, including Volvo and Ericsson.