Futures Slide As Quad-Witching Has A Violently Volatile Start After Massive BOJ FX Headfake; Oil Tumbles

Arguably the biggest event overnight was yesterday's BOJ announcement which was widely expected to be non-event, yet ended up being anything but, when, as expected, the Bank of Japan did announce it would keep overall JPY80 trillion monthly QE unchanged, as forecast by 41 of 42 economists, however it also announced it would extend the average maturity of JGB holdings to 7-12 yrs, would establish a new program for ETF purchases targeting the stocks issued by companies "proactively making investment in physical and human capital", and lastly would boost the maximum issue amount of each J-Reit to be bought from current 5% to 10%.

And so the market was suddenly wrongfooted assuming the BOJ was actually launching another episode of easing, sending the USDJPY soaring, until suddenly the realization swept the market that not only was the incremental action not really material, but even Kuroda spoke shortly after the announcement, confirming that "today's decision wasn't additional easing."

The result was one of the biggest FX headfakes in recent days, perhaps on par with that from December 4 when EUR shorts were crushed, as the biggest carry pair first soared then tumbled...

... and since the Yen correlation drives so many risk assets, also pulled down not only Japanese stocks but US equity futures. Specifically, the Nikkei initially surged as much as +2.50% immediately post the headlines, but has actually faded since and closed down 1.90%. The Yen was also nearly 1% weaker but it is actually a touch firmer on the day now as we go to print, while 10y JGB yields are down 1bp

The second most important overnight event was the release of the latest Chinese "Beige Book", which revealed that China’s economic conditions deteriorated across the board in the fourth quarter, raising doubts over "whether it’s successfully transitioning from manufacturing to services-led growth, according to a private survey from a New York-based research group."

As Bloomberg reports, "national sales revenue, volumes, output, prices, profits, hiring, borrowing, and capital expenditure were all weaker than the prior three months, according to the fourth-quarter China Beige Book, published by CBB International and modeled on the survey compiled by the Federal Reserve on the U.S. economy."

The profit reading is "particularly disturbing," with the share of firms reporting profit gains slipping to the lowest level recorded, CBB President Leland Miller wrote in the report. While retail and real estate held up reasonably well, manufacturing and services performed poorly, with revenues, employment, capital expenditure and profits weakening.

And then, the cherry on top of a turbulent pre quad-witching session, was the announcement by Ukraine that it would default on a $3 billion bond to Russia, largely as expected.

What was not expected was the continuing tremors in commodities, which contrary to endless calls that this dip is to be bought, continued sliding:

  • WTI CRUDE EXTENDS LOSS, TRADES 46 CENTS LOWER AT $34.49/BBL
  • WTI UNDERCUTS DEC. 14 LOW, DROPS TO $34.43/BBL

And while it's not news as we have been warning about it for the past two weeks (and again last night), today's quad-witching with the biggest S&P options expiration in years (mostly puts) will assure a violently volatile, illiquid session.


Looking closer at regional markets, Asian stocks traded mostly lower following the weak close on Wall St. amid continued weakness in the commodities complex coupled with a reversal of the post¬FOMC rally, while volatility was observed among Japanese asset classes after the BoJ decided to stand pat on policy but announced new ETF asset measures. As a result, the Nikkei 225 (-1.9%) swung between gains and losses before ultimately trading in negative territory as some viewed the measures as not that significant, while large mining names capped gains in the ASX 200 (+0.1%). Elsewhere, Chinese bourses pared their commodity triggered slump with the Shanghai Comp. (0.0%) relatively flat after gains in developers, who benefitted on the back of better than prior Chinese property prices, offset material weakness in the index. Finally 10yr JGBs tracked USTs higher, while the risk off sentiment in the region also supported inflows into the safe asset.

All China November New Home Prices rose 0.9% vs. Prey. 0.1% in October. China New Home Prices rose M/M in 33 cities vs. 27 in October and rose Y/Y in 21 cities vs. 16 in October.

In terms of the BoJ decision, they kept monetary policy steady at a JPY 80trl annual rise in monetary base as expected, but announced a new program to purchase additional ETFs. The BoJ extended growth lending programs by a year and extend the average maturity of JGB holdings to 7-12yrs, while under the new ETF program it will purchase JPY 300bIn annually in addition to the current ETF purchases.

Elsewhere, it also added that it will begin selling stocks purchased from financial institutions from April next year. Volatility was observed across Japanese asset classes, with initial upside being seen in both the Nikkei and USD/JPY before paring the move shortly after.In equity markets, Europe has continued the trend set by US and Asian markets, with Euro Stoxx residing in negative territory (-0.7%) to pare back some of the recent, post-FOMC gains. The FTSE outperforms in Europe so far (-0.0%), with the index benefitting from strength seen in energy and utility names, with the former bolstered by a bid this morning in the energy complex.

Fixed income markets have also seen a retracement of recent price action, with Bund futures trading higher today after significant losses on the back of the FOMC rate decision. Given the holiday-thinned volumes, month-end flows are expected to come into play earlier and analysts at Citi expect the effective duration for EGBI to increase by 0.04 years and month-ends to be particularly supportive for French and Spanish bonds.

FX markets have taken focus in the European morning and continue to be dominated by holiday-thinned markets and optionality plays. As such, GBP regained ground against USD to pare earlier losses seen following the EU cash open amid no new fundamental catalysts. Separately USD/JPY has also continued to ebb lower in the wake of the latest BoJ policy decision which left some doves in the market slightly disappointed with the pair now residing below all three key 50,100 and 200DMAs.

Looking ahead, the final Friday before Christmas sees a relatively light schedule with today's highlights including Canadian CPI and US services PMI.

Bulletin Headline Summary From RanSquawk and Bloomberg

  • USD/JPY has ebbed lower in the wake of the latest BoJ policy decision which left some doves in the market slightly disappointed with the pair now residing below all three key 50,100 and 200DMAs
  • Europe has continued the trend set by US and Asian markets, with Euro Stoxx residing in negative territory (-0.7%) to pare back some of the recent, post-FOMC gains
  • Today has a relatively light economic calendar, with highlights including Canadian CPI and US services PMI
  • Treasuries gain, 5/30 curve narrowest since April, as EGBs rally, stocks decline around the world; all maturities lower on the week amid Fed’s first rate hike since 2006.
  • Overnight, long tenors lead as EGBs extend post-Fed rally, bull flattening curves; futures outperform cash, while continued large flows in long-end EUR swaps draw some attention
  • China’s economic conditions deteriorated across the board in the 4Q, according to a private survey from a New York-based research group that contrasted with recent official indicators that signaled some stabilization in the country’s slowdown
  • U.S. high-yield funds saw outflows of $3.811b in the week ended Dec. 16, highest YTD and third-highest on record, vs outflows of $3.463b in the previous week, according to Lipper
  • Oil traded near $35/bbl and headed for a third weekly decline amid a worsening U.S. supply glut and the Fed’s rate hike
  • The Bank of Japan kept its main monetary stimulus target unchanged Friday while outlining operational changes for its purchases of government bonds, ETFs and REITs
  • The bank plans to lengthen the average maturities of the JGBs it buys to 7-12 years from current 7-10 years currently
  • U.K.’s Cameron said his bid to change Britain’s relationship with the EU is gathering momentum after fellow leaders signaled they are willing to find compromises on his demand for curbs on welfare
  • Ukraine defaulted on a $3b bond payment due to Russia on Sunday, deepening a dispute over the debt as the two sides move closer to legal action
  • Casino mogul Sheldon Adelson acknowledged presidential candidate Donald Trump’s “incredible” support among the Republican base and said he might let some primaries pass before deciding whom to back
  • Trump has criticized the influence of big donors like Adelson and mocked Marco Rubio for courting the casino tycoon’s money
  • Sovereign 10Y bond yields lower. Asia, European stocks and U.S. equity-index futures slide. Crude oil mixed, gold and copper fall

US Event Calendar

  • 9:45am: Markit US Services PMI, Dec. P, est. 55.9 (prior 56.1)
  • Markit US Composite PMI, Dec. P (prior 55.9)
  • 11:00am: Kansas City Fed Mfg Activity, Dec., est. 2 (prior 1)
  • 1:00pm: Fed’s Lacker to speak in Charlotte, N.C.

DB's Jim Reid concludes the overnight wrap

Before the holidays, just when you thought it was safe to emerge from the non-zirp waters, yesterday wiped out all of Wednesday's gains with the S&P 500 (-1.50%) and now -0.60% below the pre-rate hike levels. It has been a tough year to achieve positive returns whatever the asset class you're in. Even in markets that are up in local currency terms, often it's been wiped out in dollar terms. With that in mind I couldn't help get excited by a possible trade yesterday. Apparently some of the old original Star Wars figures from 30-35 years ago are now worth up to £18,000. The word is that at the time one stockist was extremely oversupplied and his whole inventory got dumped into a landfill site in the Midlands here in the UK. So find your shovels and follow me up the motorway this weekend!!

The force has been with the BoJ this morning. While the current ¥80tn expansion of the monetary base was kept unchanged as expected, markets initially reacted positively to the more surprising news that the BoJ is to make additional purchases of ETF’s on top of the current ¥3tn of purchases that the BoJ currently makes each year. The accompanying statement shows that the Bank’s new additional program will have an annual budget of ¥300bn and will be initially tied to the JPX-Nikkei 400 index. It’s also been announced that the BoJ is to increase the maximum amount of each issue of Japanese REIT’s it can buy. These measures were passed with a 6-3 majority. On top of this, the BoJ also announced that it is to extend the average remaining maturing of JGB purchases to about 7-12 years from the beginning of next year, from 7-10 years currently. The price action has been interesting. The Nikkei initially surged as much as +2.50% immediately post the headlines, but has actually faded since and is now down -1.20%. The Yen was also nearly 1% weaker but it is actually a touch firmer on the day now as we go to print, while 10y JGB yields are down 1bp. We await Kuroda's press conference for more details behind the move but it's another small piece of plate spinning as 2015 draws to an end.

It’s fairly unexciting in markets elsewhere in Asia this morning. The Hang Seng is +0.11%, the Shanghai Comp is +0.25% and the Kospi and ASX are lower post the losses in the US yesterday. Credit markets are the notable underperformer however, with indices 1-3bps wider. Meanwhile there was some encouraging property prices data out of China this morning where 33 of the 70 cities tracked saw new home prices rise in November, compared to just 27 companies in October.

Moving on. Oversupply still hangs over the oil market but yesterday the stronger dollar post-FOMC sunk commodities to fresh multi year lows. Oil dominated the headlines as WTI sank -1.60% and closed back below $35 for the first time since February 2009. Brent was also down nearly 1% to hover around $37, while Natural Gas finished -2% and at levels not seen since 1999 (it’s also down another 1% this morning). It was the moves in precious metals which also caught the eye. Gold closed down -1.98% which was the biggest daily loss since July and at $1051/oz is holding the five-year lows reached briefly earlier this month. Silver and Platinum were each down well over 3% with both also hovering around multi-year low levels again. Industrial metals finished generally 1-2% lower. This all came as the Dollar index recorded a sharp +1.43% gain yesterday which was the highest daily return this year. In particular, currencies in Russia, Hungary, Canada, Australia, New Zealand and South Africa were down at least 1% by the close. The biggest slide however was reserved for the Argentinean Peso which depreciated some 26% after the lifting of currency controls late on Wednesday night.

In the end it was a very weak day for US credit also. Of particular focus, CDX HY finished 27bps wider by the close of play and wiped out a decent chunk of the gains that we had seen in the prior two days. The two big US HY ETF’s both finished -1.11% and are pretty much back to where they closed last week. Meanwhile US HY energy spreads blew out 40bps wider yesterday to a new record wide at 1,310bps. US IG wasn’t immune to the moves either, CDX IG in fact finished 5bps wider which was the third weakest day this year. Rates markets rallied back as 2y yields dipped back below 1% and 10y yields finished over 7bps lower at 2.224%.

There wasn’t too much to take away from yesterday’s data which largely played second fiddle to those commodity moves. In the US we learnt that initial jobless claims fell 11k last week to 271k (vs. 275k expected) although there was less good news to come out of the December Philly Fed which fell 7.8pts this month to -5.9 (vs. +1.0 expected). The print was the second-lowest this year although it was noted that the six-month outlook print fell to the lowest since November 2012 after plunging more than 20pts. Finally the Conference Board’s leading index for November rose a better than expected +0.4% mom last month (vs. +0.1% expected).

Just wrapping up the rest of yesterday’s economic data. In Germany the IFO dipped slightly in December following some slightly weaker readings out of the domestic sectors and despite the uptick in sentiment in the manufacturing sector. The index declined a fairly modest 0.3pts to 108.7 (vs. 109.0 expected) with the current assessment reading in particular down 0.6pts this month. UK retail sales were impressive last month however, with the ex auto and fuel print rising a much better than expected +1.7% mom in November, well above expectations of +0.5%. That helped nudge the YoY rate up seven-tenths to +3.9%. Elsewhere, as expected the Norges Bank left the current policy rate of 0.75% although hinted at a possible cut in the first half of next year.

Staying with central banks, yesterday saw Mexico follow the Fed in raising its benchmark interest by 25bps. That was in fact the first hike by the nation since 2008 although it was widely anticipated. Mexico now joins Chile, Hong Kong, Kuwait and the UAE in tightening policy since the Fed on Wednesday. Despite this, in a note yesterday our Asia Macro colleagues highlighted that they do not necessarily expect other central banks in Asia to follow suit, reflective of weaker business cycles, slowing growth and in particular negative export growth. They are of the view that Asian central banks will not be able to keep up with even a gradual Fed and front-end rate differentials will narrow. They highlight that Philippines is perhaps the only central bank that they think could hike next year.

Looking ahead to what’s set to be a relatively quiet end to the week for data. In the European session this morning the only data of note is out of France where we’ll get the November PPI data. In the US this afternoon we’ll get the flash December services and composite PMI prints along with the Kansas City Fed manufacturing activity index reading for December. Of more interest perhaps will be comments from the Fed’s Lacker who is due to speak on the 2016 economic outlook at 6pm GMT tonight. He will be the first Fed speaker other than Yellen to have spoken since the rate hike.

Before we wrap up, it’s worth also reminding readers of the Spanish General Election this Sunday. We gave a bit of a rundown yesterday but just recapping again, while a central case scenario is probably still a PP minority government with external support from Citizens, recent swings in opinion polls means the main risk remains political impasse through a fragmented parliament. It’s certainly worth keeping an eye on Sunday’s outcome.