Equities Soar, Oil Back Over $30 On Hopes For More Stimulus Following Disturbing Chinese Data

Only the most intellectually dishonest can claim that last night's Chinese economic data deluge was anything but miserable. As we showed last night, everything missed:

  • Industrial Production +5.9% (MISS vs +6.0% YoY expectations)
  • Retail Sales +11.1% (MISS vs +11.3% YoY expectations)
  • Fixed Asset Investment +10.0% (MISS vs +10.2% YoY expectations),
  • Q4 GDP growth +6.8% (MISS vs +6.9% YoY expectations).

Even as the real full year GDP of 6.9% was in line, it was still the lowest since 1990...

... while the nominal Q4 GDP was well below 6% when excluding the 0.9% deflator, suggesting unadjusted Chinese growth just had its worst quarter in the 21st century.

MarketNews' take confirmed as much: "a closer look under the hood shows a more troubling picture. Industrial output growth in December slid back to below 6% after a surprise acceleration in November, fixed-asset investment growth continued its slow grind lower, coming in at 10% for the Jan-Dec period, the weakest pace since 2000. The overhang of unsold real estate persists and although sales are improving in first-tier cities, the government's own data show that floor space under construction rose just 1.3% in 2015. While that's an improvement from a record low of -3.6% in the Jan-Aug y/y period, the lack of growth in investment will continue to be a significant drag on the economy this year given the sector's importance to other industries including steel, cement and household goods."

Official data on the source of funding for fixed-asset investment show that funds from the state budget rose 15.6% in 2015, slowing from 21.4% for the Jan-Nov 2015 period, and little higher than the 14.1% for full-year 2014, which indicates some moderation at the end of the year. Lending weakened further as a source of investment funding, dropping 5.8% for the full year, compared with a decline of 4.3% in the first 11 months. This doesn't bode well for a significant pickup in investment growth in 2016.

 

Real average disposable income growth weakened to 7.4% y/y last year from 8% in the previous year, hardly a boost for consumption. So there are few reasons to take heart from the headline 2015 GDP number even though it was in line with Premier Li Keqiang's target.

Other estimates of China's GDP were even worse, with Oxford Economics calculating only 6.3% growth in 2015 and 6.1% y/y in Q4, while Capital Economics estimated China grew only 4.5% in Q4.

So if bad news was bad news, both commodities (read oil) and US equity futures should be tumbling right now... but just the opposite is happening and in fact both Brent and WTI have already jumped over $30 this morning.

This happens even as the IEA said this morning that global oil markets could “drown in oversupply,” sending prices even lower as demand growth slows and Iran revives exports with the end of sanctions, according to the International Energy Agency.

The IEA trimmed 2016 estimates for global oil demand as China’s economic expansion weakens and raised forecasts for supplies outside the Organization of Petroleum Exporting Countries. While non-OPEC supply is set to drop 600,000 barrels a day in 2016, Iran’s comeback could fill that gap by the middle of the year. As a result, world markets may be left with a surplus of 1.5 million barrels a day in the first half.

So why are both commodities, global stocks and futures soaring?

Simple: the following Bloomberg headline summarizes it: "Brent Rallies More Than $1 as China GDP Spurs Stimulus Bets," and where Brent goes, so goes risk, and the S&P.

It wasn't just speculation: confirming that China is getting more actively involved in "risk management" was the following headline moments ago, showing that the PBOC injected over 400 billion yuan into Chinese banks so far this week.

  • CHINA PBOC: CNY82 BLN IN 1Y MLF; CNY328 BLN IN 3-MONTH MLF
  • CHINA PBOC INJECTS CNY410 BLN VIA MLF TO BANKS

And then, the National Team arrived: the Shanghai Composite Index rallied 3.2 percent, the most since November, with Reorient Financial Markets Ltd. saying government-led funds may have entered to bolster the market.

Which means one thing: bad news is good news again, if only for a few days or until the previously noted "oversold" bounce takes place. In fact the only underperforming asset today, for the second day in a row, were Italian banks and the FTSE MIB index in general, as a result of many financials being halted from trading after reports the ECB are looking to investigate banks non-performing loans.

Here is a quick snapshot of where global risk indexes could be found this morning.

  • S&P 500 futures up 1.7% to 1907
  • Stoxx 600 up 1.9% to 335
  • FTSE 100 up 1.7% to 5879
  • DAX up 1.8% to 9694
  • German 10Yr yield up 1bp to 0.55%
  • Italian 10Yr yield up less than 1bp to 1.57%
  • Spanish 10Yr yield down 2bps to 1.73%
  • MSCI Asia Pacific up 0.9% to 120
  • Nikkei 225 up 0.5% to 17048
  • Hang Seng up 2.1% to 19636
  • Shanghai Composite up 3.2% to 3008
  • US 10-yr yield up 2bps to 2.06%
  • Dollar Index up 0.21% to 99.17
  • WTI Crude futures up 1.3% to $29.80
  • Brent Futures up 3.9% to $29.65
  • Gold spot down 0.2% to $1,087
  • Silver spot up 0.7% to $14.05

Here is how the realization that China's terrible economic data is really great for risk assets, starting in Asia, where equity markets traded mostly higher in what was a volatile session following the release of key data from China which saw 2015 GDP at its slowest annual growth in 25 years. Shanghai Comp. (+3.2%), rose back above the 3,000 level after being initially weighed by the miss on GDP, Industrial Production and Retail Sales figures. However, sentiment then reversed as the weak data stoked expectations for further easing measures, while the PBoC also offered funds via medium term lending facilities in tenors of 3-months and 1-year, with the latter being offered for the 1st time in history. This comes after some turmoil seen yesterday, were the PBoC implemented a reserve requirement ratio to some banks involved in the CNH market.

Top Asian News

  • Yuan Bears Stick to Their Guns After PBOC Attacks on All Fronts: Rabobank sees drop to 7.6 in 2016, Natixis predicts 6.95.
  • Biggest Leveraged ETF Takes in $1.5 Billion as Japan Stocks Sink: Next Funds Nikkei 225 Leveraged Index ETF took in 177.4b this year.
  • SoftBank Plunges to Lowest Since Sprint Buy as Doubts Mount: Shares fell yesterday to lowest level since buying Sprint in 2013 amid mounting pessimism that billionaire Masayoshi Son can turn around the money-losing U.S. carrier.
  • Cnooc to Cut Spending, Output Amid Crude’s Plunge Below $30: Co. to decrease capex to “no more than” CNY60b ($9.1b) this year from a target of as much as CNY80b for 2015.
  • Ex-Goldman Macro Trader Lim Reopens $1.1 Billion Hedge Fund: Leland Lim’s Guard macro hedge fund returned 8.1% in 2015.
  • Mukesh Ambani’s Reliance Jio to Raise $2.2 Billion in Share Sale: Jio’s rights offering will involve issuing 15b shrs.
  • YouTube Access Restored in Pakistan After 3-Year Blackout: Site was forbidden to prevent people from watching a film branded as anti-Islam.
  • Chevron Signs Second China LNG Deal as Gorgon Output Nears: Co. plans to supply upto 500kt/y of LNG to unit of ENN Energy Holdings from Gorgon project.

European equities kicked off to a positive start, despite another set of disappointing data from China. Headline GDP (Q4 Y/Y 6.8% vs. Exp. 6.9% Prey. 6.9%) and Industrial production (Y/Y 5.9% vs. Exp. 6.0% Prey. 6.2%) figures missed on expectations . An uptick in sentiment has also been helped by the announcement PBoC have moved to provide funds via medium term lending facilities in tenors of 3-months and 1-year, with the latter being offered for the 1st time in history. The energy sector benefits from Brent and WTI futures trading firmly above the USD 29.00 level, and out performs its counterparts in Europe. The FTSE MIB remains the laggard for the second consecutive day, with many financials halted from trading, with reports the ECB are looking to investigate banks non-performing loans. The underperformance in Italian financials has also led to an uptick in Bunds, as investors seek a safe haven.

European Top News

  • Credit Agricole Confirms Plan to Sell Bank Stakes; Shares Surge: Co. confirmed it’s exploring sale of stakes in more than three dozen regional banks.
  • Paschi, UniCredit Among Banks Pressed for Loan Data by ECB: Banks among Italian lenders asked to submit data on their NPLs as ECB toughens scrutiny of region’s credit quality.
  • Adidas Says Henkel’s Rorsted to Succeed Hainer as CEO: Rorsted, 53, will join Adidas board on Aug. 1, take over as CEO 2 months later.
  • U.K. December Inflation Edges Up on Fuel Costs, Air Fares: Prices rose an annual 0.2%, most since Jan., following a 0.1% gain in Nov.
  • Norway’s Top Tech Fund Snaps Up Apple Again After Stock Rout: DNB Nordic Technology, which has beaten its peers 7 of 10 past years, according to data compiled by Bloomberg, bought a “little bit” in Apple last Tues. after exiting stake in spring 2015.
  • HBO Plans to Take On Netflix in Spain With Streaming Service: By end-2016, residents in Spain will have access to an HBO streaming service for first time.
  • Hollywood Studios Fight Back as EU Attacks Content Curbs: Studios including 20th Century Fox, Sky Plc are seeking to stave off possible EU fines as bloc’s antitrust chief considers curbs on where they sell content.
  • Priciest Stockholm Homes Slip Amid Signs Tipping Point Reached: After rising 17% over the past year, prices in central Stockholm fell 1% in 3 months through Dec.

In FX, the yen dropped 0.5 percent to 117.92 per dollar as investors unwound demand for the currency as a haven from turmoil in China. It has strengthened 2 percent this month.

South Africa’s rand led gains in the currencies of commodity producing nations, rising for first time in three days. It climbed 1.6 percent, leading a gauge of 20 emerging-market currencies 0.4 percent higher on Tuesday. Australia’s currency gained 1.1 percent. Russia’s ruble strengthened 1.3 percent to 78.31 against the dollar.

Turkey’s lira gained 0.4 percent before a central bank meeting. Two-year note yields were little changed at 11.11 percent. Policy markers will keep interest rates unchanged, according to the median estimate in Bloomberg surveys of economists.

The Hong Kong dollar slipped 0.1 percent to 7.8059 per dollar, the weakest since September 2011. The currency was near the mid-point of the HK$7.75-HK$7.85 trading range that’s existed for more than a decade.

In commodities, the Bloomberg Commodity Index rose 1.2 percent, after closing at the lowest level since at least 1991 on Friday. Brent crude climbed as much as 3.9 percent to $29.67 a barrel, paring its decline this year to 21 percent.

The International Energy Agency, adviser to 28 advanced economies, said Tuesday that global oil markets could “drown in oversupply,” sending prices even lower as demand growth slows and Iran revives exports.

Copper gained 1.4 percent as stock markets jumped in China, the world’s biggest metals consumer. Former Federal Reserve Chair Ben Bernanke said China was making “good progress” with financial reforms.

Corn climbed to the highest in almost four weeks as drought threatened to hurt African crops.

Looking at the day ahead, the lone release in the US is the NAHB housing market index print. Earnings wise the focus today looks set to be on the banks with Bank of America and Morgan Stanley reporting at the open, while IBM is due to report post the closing bell

Overnight Bulletin Summary From RanSquawk and Bloomberg

  • The steady risk mood in FX continues into todays session, lifting the correlated currencies but cautiously so as yet
  • European equities (Euro Stoxx 2.0%) kicked off to a positive start, despite another set of disappointing data from China, where GDP and IP missed expectations
  • Today's highlights include comments from BoE's Carney and ECB's Nowotny
  • Treasuries decline to open the week; 10Y yields holding near lowest since October after rallying as much as ~24bp since start of year amid equity rout, growth concerns.
  • The IMF cut its world growth outlook, as the commodities slump and political gridlock push Brazil deeper into recession, plunging oil prices hobble Mideast crude producers, and the rising dollar curbs U.S. prospects
  • Banca Monte dei Paschi di Siena SpA, UniCredit SpA and Banca Popolare dell’Emilia Romagna SC were among Italian lenders asked to submit data on their non-performing loans as the ECB toughens scrutiny of the region’s credit quality
  • Merkel’s is poised for a week of refugee politicking after mass sexual assaults on New Year’s Eve increased pressure on her to impose border restrictions, a demand championed by lawmakers in her party bloc who plan to hand her a letter of protest today
  • China’s industrial production, retail sales and fixed-asset investment all slowed in December, capping the weakest quarter of growth since the 2009 global recession, as the Communist leadership grapples with a transition to consumer- led expansion
  • Chinese stocks rallied as the weaker-than-estimated data fueled speculation of increased stimulus and industrial shares rallied on prospects of state-fund buying
  • For Chinese consumers, the benefit of oil’s crash stops at $40/bbl because the retail price of fuels such as gasoline won’t be cut in line with crude as long as it trades below that level, according to the country’s top economic planner
  • China’s securities regulator denied a Reuters report that its Chairman Xiao Gang offered to resign
  • Germany’s ZEW index of investor expectations fell to 10.2 in January (est 8) from 16.1 in December
  • Sovereign bond yields higher. Asian stocks and European stocks gain; equity-index futures advance. Crude oil and copper rally, gold falls

US Economic Calendar

  • 10:00am: NAHB Housing Market Index, Jan., est. 61 (prior 61)
  • TBA: Total Net TIC Flows, Nov. (prior $68.9b)
  • Net Long-term TIC Flows, Nov. (prior -$16.6b)
  • 11:30am: U.S. to sell $31b 3M bills, $26b 6M bills

Top Global News

  • China GDP Slows to Weakest Since 2009 on Manufacturing Slide: 4Q GDP grows 6.8% y/y vs est. 6.9%.
  • IEA Says Oil Rout Could Deepen as Market ‘Drowns’ in Oversupply: Global oil markets could “drown in oversupply,” sending prices even lower as demand growth slows with Iran ramping up exports after sanctions.
  • Benefits of Iran Sanctions Relief to Bypass Most U.S. Firms: Actions taken Saturday in Vienna leave in place number of U.S. restrictions on commercial dealings with Iran.
  • Suncor to Buy Canadian Oil Sands After Raising Offer by 12%: Co. raised its all-stock offer by 12% to C$4.2b ($2.9b), winning approval from management team that had rejected earlier approaches.
  • Woolworths, Lowe’s Exit Unprofitable Home-Improvements Unit: Cos. exiting their unprofitable Australian home-improvements venture after failed 6-year attempt to take on market leader Bunnings Ltd.
  • U.S. Court Backs Apple Motion in Patent Case Against Samsung: Court ordered Samsung to stop using software in the U.S. that helps mobile phones infringe on those patents.
  • General Motors Salvages Ride-Hailing Company Sidecar for Parts: Automaker acquired technology, most assets of ride- hailing pioneer Sidecar Technologies.
  • Facebook’s WhatsApp Drops Subscription Fee, Tests New B2C Tools: messaging service to drop annual $0.99 subscription fee; to test ways to monetize its nearly 1b customers by allowing businesses to communicate with users.
  • Amazon Veers Into Labor Law Fight Zone for Hurried Deliveries: Co.’s push into ultra-fast delivery has landed it in court with drivers claiming they’re being exploited.
  • Qualcomm Seeks JV Shortcut to Server Sales in China: Co. trying to break Intel’s dominance of chip sales for server computers, is forming a JV in China.
  • Bank of Montreal Enters Robo-Advising Ahead of Other Lenders: Co. starts signing up customers for its automated low-fee investment-advice platform this week.
  • Trump Says He’ll Get Apple to Manufacture Products in U.S.: “We’re gonna get Apple to start building their damn computers and things in this country instead of in other countries.”
  • Clinton, Sanders Fight for Title of Obama’s Heir in S.C.: Clinton tightened her embrace of Barack Obama on Sunday as Sanders tried to tie her to Wall Street in final debate before Feb. 1 Iowa caucus.
  • World’s Richest Down $305b as Markets Extend Global Rout: 400 richest people have lost $305b from their combined net worth this month. Richest 1% Now Wealthier Than the Rest of World: Oxfam
  • ‘Ride Along 2’ Topples ‘Star Wars’ in Holiday-Weekend Box Office: Film knocked latest “Star Wars” movie from top box office spot over Martin Luther King Jr. holiday weekend.

DB's Jim Reid completes the overnight wrap

There’s only one place to start this morning and that’s in China where there’s been some significant data to digest including the much anticipated growth numbers. Q4 GDP has printed at 6.8% yoy, below market expectations of 6.9% and down one-tenth from Q3. It is also the lowest print since Q1 2009 and at the bottom end of most economists’ estimates (16 of 43 surveyed expected 6.8% or below). That means GDP growth for full year 2015 was 6.9% (which was in line with consensus estimates) which the government will argue is in line with their estimate of ‘about 7%’. There’s no doubt that Q4 came in a bit softer than hoped however with the Q4 qoq print of 1.6% missing expectations by two tenths.

The monthly activity indicators were also generally disappointing. Industrial production slowed to 5.9% yoy (vs. 6.0% expected) last month, down from 6.2% in November. Fixed asset investment slowed to 10.0% yoy (vs. 10.2% expected) and a decline of two-tenths from the previous month. Finally retail sales grew 11.1% yoy in Dec (vs. 11.3% expected), also seen as disappointing having been 11.2% in November.

It’s hard to know what to make of the price action since the data. The Shanghai Comp had been trading with a mildly positive tone into the numbers (+0.7%) only to then wipe out all of those gains in the 30 minutes post the data. The interesting move has come since though with the index now up +2.54% post the midday break with little obvious news flow to drive the surge. It could be hope of fresh stimulus, intervention or just positioning. The CSI 300 (+2.68%) and Shenzhen (+2.89%) are up similar amounts while there’s been some wild moves for the Hang Seng also but that’s currently sitting with a +1.43% gain. Keep a close eye on moves into the close and after we go to print. Moves have been a bit more subdued for the Nikkei and Kospi, with both posting modest gains of close to half a percent. China sensitive currencies including the Aussie Dollar were also sharply lower post the data but have rallied back to trade higher on the day. Credit indices have gained meanwhile with the Asia iTraxx currently 4bps tighter. US equity futures are also pointing towards a reasonable start, trading with gains of close to 1% while Brent Oil is up nearly 2%.

Moving on. With US markets closed yesterday and investors in a bit of a wait and see mode for this morning’s China data there wasn’t a whole lot more newsflow over the past 24 hours. Despite volumes being lower than normal, it was still another broadly weaker day for risk assets in Europe however as Brent extended its move further below $29/bbl after falling -1.35% (although in fairness pared much larger moves lower during the Monday Asia session when it tumbled below $28) with the overall fallout from the lifting of the Iran sanctions over the weekend perhaps less severe than expected. Instead it was the weakness in European banks which had a more damaging effect yesterday (more on that shortly). The Stoxx 600 closed -0.36% by the end of play for its third consecutive down day and eighth in eleven sessions so far this year, with the YTD loss now creeping past 10%. Weakness was led by the peripheral bourses though with the Spanish IBEX closing -0.87% and the Italian FTSE MIB down a steep -2.65%. Credit indices finished slightly weaker also with Main (+1.5bps) and Crossover (+3.5bps) a touch wider, although the underperformance clearly coming from the financials with the sub-fins index yesterday closing +8bps wider.

As highlighted the big moves yesterday came in financials and specifically Italian banks. Monte dei Paschi (-14.76%), Banca Popolare (-8.73%) and UBI (-7.28%) saw the steepest drops following news that the ECB’s central oversight arm, the Single Supervisory Mechanism, is set to carry a deep dive on the banking system, scrutinizing non-performing loans and bad debts in particular. The moves yesterday were enough to see Italian market regulator Consob impose a short selling ban on Monte dei Paschi while unsurprisingly subordinated and junior debt in Italian lenders came under big pressure, with Monte’s 2020 sub notes yesterday declining 10pts post the news. On top of the Novo Banco issues, the recent news is bringing peripheral bank headlines and concerns about asset quality back to the forefront.

In terms of the rest of the price action yesterday, rates markets were fairly benign with little change in yields across most of the core sovereign markets, while Portugal (+3.2bps) continues to be the notable underperformer. The data calendar was quiet. UK house prices nudged up 0.5% mom this month while Italy reported a slightly narrower than expected trade surplus. Meanwhile the slightly calmer day for Oil, all things considered, help precious metals post some decent gains with Copper, Zinc and Nickel up 1%-2%.
Of some interest were the relatively contrasting comments from ECB officials meanwhile. The ECB’s Villeroy sounded more upbeat when commenting that the European recovery is on track and stimulus measures put in place by the ECB are bearing fruit. Governing Council member Rimsevics warned however that ‘I am concerned that people are a bit too relaxed’ about a slowdown in China and the knock on effect that this may have on Europe.

Looking at the day ahead, the calendar kicks up a gear today and we start this morning in Germany where we will receive the final read for December CPI. Shortly following this will be the December inflation dump out of the UK with the CPI/RPI/PPI docket. The final revision to Euro area CPI for December follows this (no change expected at +0.2% yoy at the headline and +0.9% yoy at the core) before we get the January ZEW survey reading out of Germany. In the US this afternoon the lone release is the NAHB housing market index print. Earnings wise the focus today looks set to be on the banks with Bank of America and Morgan Stanley reporting at the open, while IBM is due to report post the closing bell