Following the Fed's disappointing "dovish, but not dovish enough" statement which effectively admitted Yellen had committed policy error by hiking just as the US economy "was slowing down" which in turn lowered the odds of a March rate hike to just 18%, it was up to oil to pick up the correlation torch, and so it did, rising in an otherwise mixed session which has seen European stocks slide on continued weakness surrounding Italian banks, many of which have been halted limit down, while Asia was unable to pick a direction after the resignation of Japan’s "Abenomics" minister Akira Amari to over a graft scandal and yet another rout for Chinese stocks.
Before we get to the US, we should note what is going on in China where the Shanghai Composite Index fell by another 2.9% to 2655.66, capping a 9.6 percent retreat over three days, as concern a weakening economy will reduce corporate profits overshadowed the biggest cash injection into the financial markets in three years. The SHCOMP closed at the lowest level since November 2014, taking its decline for the year to 25 percent, the most since 2008. As Bloomberg notes, authorities continue to take measures to stabilize the nation's financial markets but having most of their time focused on propping up the devaluing currency, they appear to have left equity investors to fend for themselves.
This week's net injection of 590 billion yuan ($90 billion) into the money markets ahead of the start of the Chinese new year was the biggest since February 2013, however it wasn't big enough. Further declines in the equity benchmark could be on the way. Strategists and technical analysts surveyed by Bloomberg are targeting a bottom of 2,500, compared with 2,656 today. Since the Shanghai Composite Index reached a record high on June 12 it has plummeted 48 percent. As can bee seen on the chart below, it remains the world's worst performing major equity index in 2016.
Away from Asia, futures on the Nasdaq 100 Index climbed driven by Facebook which jumped 12% in early New York trading after posting another record earnings period. Technology peers also rallied, with more than 2 percent gains each in Google parent Alphabet Inc., Apple Inc., Netflix Inc., Amazon.com Inc. and Microsoft Corp. Amazon and Microsoft are due to report results today, along with some 50 other Standard & Poor’s 500 Index members.
And while Europe was initially happy to track oil modestly higher, it has since then stumbled deep in the red following the latest bout of risk in Italy where banks fell for the second day, leading the FTSE MIB to underperform the broader European market, and pushing the FTSE Italia All-Share Banks index down 4.2% as of 12:18pm CET. Indeed, this morning has been a a freeze fest, with Pop. Milano, UniCredit, Monte Paschi, Pop. Emilia shares halted; down ~5% or more after Banca Akros says price of the "bad bank" guarantee looks rather costly, doubts many Italian banks will be interested in using it to offload bad loans.
The one silver lining has been the MSCI Emerging Markets Index which rose for a second day and Gulf stocks were on course for their best week since December 2014. as U.S. crude headed for a three-day advance, helping boost currencies of commodity-exporting nations. "Emerging-market assets are rallying across the board today as the Fed sounded relatively dovish watching global developments,” said Bernd Berg, an emerging markets strategist in London at Societe Generale SA. “A March Fed rate hike looks increasingly unlikely now. I think we are now entering a risk-on phase and oil-related currencies will post a sizable rally."
However, that may not last: with the futures picture changing dramatically, moments ago US equity futures slid as Oil erased all of its losses for the day:
- WTI CRUDE ERASES GAINS, TRADES LITTLE CHANGED AT $32.26/BBL
- WTI Crude Erases Earlier Advance, Dips 0.4% to $32.16/Bbl
- S&P FUTURES QUICKLY TURN LOWER; OIL FALLS; EU STOCKS DROPPING
And then as oil was sliding, a familiar headline reappeared:
- RUSSIAN ENERGY MINISTER NOVAK SAYS OPEC IS TRYING TO ORGANISE MEETING OF OPEC AND NON-OPEC COUNTRIES IN FEB
Maybe it can work for a second day in a row.
And while risk levels are changing rapidly and violently by the minute, this is roughly where we stand
- S&P 500 futures down 0.1% to 1872
- Stoxx 600 down 1.0% to 336.8
- MSCI Asia Pacific up less than 0.1% to 120
- Nikkei 225 down 0.7% to 17041
- Hang Seng up 0.8% to 19196
- Shanghai Composite down 2.9% to 2656
- S&P/ASX 200 up 0.6% to 4976
- US 10-yr yield up 2bps to 2.02%
- Dollar Index down 0.11% to 98.8
- WTI Crude futures up 1.6% to $32.83
- Gold spot down 0.6% to $1,118
- Silver spot down 0.4% to $14.43
A quick stroll through regional markets, we find Asian equity markets traded mixed having initially shrugged off the negative lead from Wall St . ASX 200 (+0.6%) outperformed amid gains in commodity names after crude briefly regained the USD 32/bbl level, while the Nikkei 225 (+0.7%) saw indecisive trade with participants tentative ahead of the BoJ policy decision tomorrow. Shanghai Comp (-2.9%) extended on its weakening trend, although is off its worst levels after the PBoC injected CNY 340b1n into the inter-bank market. 10yr JGBs traded lower, amid a suspected lack of buyers as participants await tomorrow's conclusion to aforementioned policy meeting in which the BoJ is widely expected to remain on hold.
European indices trade in negative territory amid choppy trade with stabilizing oil markets failing to give stocks a lift. As North American participant come to their desks, stocks are gradually approaching their post-FOMC levels, after a cautious Fed revealed they are not blind to the risks the global economy faces, which resulted in pressure upon stock markets and a flight to safe-haven assets. Energy is supporting stocks, with the sector outperforming in the Euro Stoxx 600. The SMI (-1.5%) is the notable underperformer amongst the premier indices, its second largest component Roche (-4.3% ) weighing it down after predicting a less than stellar outlook for the coming year, with sales expected to grow in mid to low single digits.
In FX, Risk tone is mixed and as such short term speculators have taken the opportunity to buy USD/JPY this morning, taking encouragement from the domestic and offshore buying seen overnight. News that the Japanese Econ Min Amari will step down prompted a brief hit, but this looks to be short lived with the push for 119.00 back on in anticipation of the BoJ meeting this evening.
A gauge of 20 emerging-market currencies rose for a third day, gaining 0.4 percent. Russia’s ruble led the advance, climbing 1.3 percent in a third day of gains. Malaysia’s ringgit strengthened 1.1 percent, after Prime Minister Najib Razak maintained his fiscal-deficit target and announced measures to shore up an economy hit by a plunge in oil. Turkey’s lira and South Africa’s rand appreciated at 0.7 percent.
The pound advanced versus most of its 16 major peers after a report showed the U.K.’s economic expansion accelerated in the fourth quarter. Britain’s economy grew 0.5 percent in the final three months of 2015, from 0.4 percent in the third quarter, matching to the median forecast of analysts surveyed by Bloomberg.a
In commodities, West Texas Intermediate crude rose 0.7 percent to $32.54 a barrel after gaining 6.4 percent over the past two days. It’s recovering after falling to $26.19 on Jan. 20, its lowest since 2003.
The worldwide surplus will decline this year even after Iran adds an expected 500,000 barrels a day of output, United Arab Emirates Energy Minister Suhail Al Mazrouei said on his Twitter account. U.S. crude inventories increased by 8.38 million barrels last week, the biggest gain in volume since April, according to a weekly report from the Energy Information Administration.
Looking at the US calendar we’ve got last week’s initial jobless claims reading before the important preliminary December durable and capital goods orders data. Last month’s pending home sales data follows this and we close with the Kansas City Fed manufacturing activity index reading. Earnings wise today we’ve got 52 S&P 500 companies set to report with the highlights being Amazon (after-market), Caterpillar (before the open), Microsoft (after-market) and Ford Motor (before the open).
Global Top News
- Deutsche Bank Securities Unit Reports Loss on Revenue Slump: Transaction banking only unit at group to post profit gain
- Japan’s ‘Abenomics’ Minister Amari to Resign Over Graft Scandal: Economy Minister Akira Amari to resign, article alleges he took cash
- company in breach of law
- U.K. Economy Gained Momentum at End of 2015 on Services Growth: GDP rose 0.5% in 4Q
- Euro-Area Economic Confidence Declines to Lowest in Five Months: Indicator falls to 105 in January from 106.7 in December
- Roche Declines After Full-Year Profit Misses Analyst Estimates: Co. sees 2016 sales having low- to mid-single digit growth
- China’s Money-Market Operations Inject Most Cash in Three Years: PBOC’s reverse repos add a net 590b yuan this week
- Google Tax Deal May Be Next in Line for EU Probe, Vestager Says: EU competition chief Margrethe Vestager said she’s ready to investigate Google parent Alphabet’s GBP130m U.K. tax deal
- Takata CEO Said to Face Pressure to Resign as Crisis Deepens: Honda said to be more receptive on support if CEO resigns
- Wynn Resorts, Boston Reach Settlement on Everett Casino: Globe
- Apple May Introduce New IPad at March Event: 9to5Mac
- NetApp Said to Close SolidFire Deal Next Week: CRN
- Alibaba Said to Sell Meituan-Dianping Stake in $900m Deal: WSJ
Bulletin Headline Summary from RanSquawk and Bloomberg:
- Brent and WTI continue to grind higher, looking to test USD 34.00 and USD 33.00 respectively, in spite of the large DoE build seen yesterday
- European indices trade in negative territory amid choppy trade with stabilizing oil markets failing to give stocks a lift
- Looking ahead, highlights include German national CPI, UK GDP, US weekly jobless data, durable goods and pending home sales, comments from ECB's Costa, Nowotny and Weidmann andf Microsoft earnings
- Treasuries lower in overnight trading before this week’s U.S. auctions conclude with $29b 7Y notes, WI yield 1.78%, compares with 2.161% awarded in Dec., highest 7Y auction stop since 2.235% in Sept. 2014.
- Federal Reserve Chair Janet Yellen and her colleagues have opened the door to a change in their outlook for the economy this year, and possibly a slower pace of interest-rate hikes that would make a move in March less likely
- There’s been speculation recently about whether the U.S. and the world are about to sink into recession. Underpinning much of the angst is an unprecedented $29 trillion corporate bond binge that has left many companies more indebted than ever
- Threats to financial stability include long-term impact on risk-taking of “persistently low interest rates,” increasing debt and declining credit quality in U.S. companies and emerging markets, according to Office of Financial Research’s annual report
- The U.K. economy gained a little momentum at the end of last year, thanks entirely to the services industry. 4Q GDP rose 0.5% from the previous three months, when it expanded 0.4%
- Spanish unemployment dropped to 20.9% from 21.2% the previous quarter to its lowest in almost five years, as Acting PM Mariano Rajoy struggles to form a government following an inconclusive election
- Euro-area economic confidence slumped to 105 from a revised 106.7 in December, the lowest since August, strengthening the European Central Bank’s case for increasing stimulus
- Currency traders are writing off Haruhiko Kuroda’s ability to weaken the yen the way he did in 2014, when he expanded his record monetary stimulus program
- Japanese Economy Minister Akira Amari resigned amid allegations he received money in return for favors. A tearful Amari apologized for the scandal, saying any cash received by his office was a political donation
- $2b IG corporates priced yesterday along with $300m HY. BofAML Corporate Master Index OAS 1bp wider yesterday at +200; 2015 range 180/129. High Yield Master II OAS tightened 5bp to +778; 2015 range 733/438
- Sovereign 10Y bond yields mostly steady. Asian stocks mixed, European stocks drop; U.S. equity-index futures rise. Crude oil rises,
US Economic Calendar
- 8:30am: Initial Jobless Claims, Jan. 23, est. 281k (prior 293k); Continuing Claims, Jan. 16, est. 2.218m (prior 2.208m)
- 8:30am: Durable Goods Orders, Dec. P, est. -0.7% (prior 0.0%)
- Durables Ex-Transportation, Dec. P, est. -0.1% (prior 0%)
- Cap Goods Orders Non-Def Ex-Air, Dec. P, est. -0.2% (prior -0.3%)
- Cap Goods Ship Non-Def Ex-Air, Dec. P, est. 0.8% (prior -0.6%)
- 9:45am: Bloomberg Consumer Comfort, Jan. 24 (prior 44)
- 10:00am: Pending Home Sales m/m, Dec., est. 0.9% (prior -0.9%)
- Pending Home Sales NSA y/y, Dec., est. 4.8% (prior 5.1%)
- 11:00am: Kansas City Fed Mfg Activity, Jan., est. -10 (prior -9)
DB's Jim Reid concludes the overnight wrap
Looking at our screens this morning, it’s been a relatively mixed start for bourses in Asia but after a weak open, some positive sentiment is returning as we reach the midday break. There’s been gains this morning for the Hang Seng (+0.18%), Kospi (+0.31%) and ASX (+0.60%) after all three opened in the red, while in Japan the Nikkei is currently -0.44% but opened down nearly -1.5% following the FOMC selloff in the US last night. China is bucking the trend with markets seemingly struggling to trade with any conviction. The Shanghai Comp is currently -0.59% but has swung between gains and losses this morning. Elsewhere WTI is off around a percent in Asia and back below $32/bbl. Datawise the only release of note has been a softer than expected Japanese retail sales print (-0.2% mom vs. +1.0% expected).
Moving on. Earnings season is ramping up with a number of bellwether corporates reporting. Much like what we saw with Apple, despite Boeing’s quarterly earnings coming in ahead of analyst estimates investors latched onto the soft outlook for the quarter and year ahead which sent shares plummeting nearly 9% lower by the close. After the close we also got some bumper numbers out of Facebook (beat both earnings and revenue expectations) which sent shares up as much as 12% in extended trading (while US equity index futures are also up this morning). That was in stark contrast to eBay however who saw its share price down double digits after the close with management outlining a slightly more difficult quarter ahead than analysts had expected. All told yesterday we saw 33 S&P 500 companies report with 18 beating revenue expectations (55%) and 27 (82%) coming ahead of earnings estimates. That was slightly better than the overall trend so far after 133 companies having reported with 52% and 80% beating sales and earnings expectations respectively.
Elsewhere, the rest of the price action in markets played second fiddle to the FOMC. European equities managed to eke out small gains yesterday after trading with losses for much of the session (Stoxx 600 closing +0.31%). Meanwhile in terms of the economic data we saw both German (9.4 vs. 9.3 expected) and French (97 vs. 96 expected) consumer confidence indicators come in a smidgen ahead of expectations. In the US the only data of note was a greater than expected surge in December new home sales (+10.8% mom vs. +2.0% expected) which rose to a ten-month high after being put down to the unseasonably warm weather last month.
Looking at the day ahead, it’s a busy one for economic data and we kick off in Germany this morning where we’ll get the December import price index print. That’s before we turn to the UK where the advanced Q4 GDP print is due to be released (+0.5% qoq expected) followed by various confidence indicators for the Euro area. Germany’s preliminary CPI report for January is due out after this. Over in the US this afternoon, we’ve got last week’s initial jobless claims reading before the important preliminary December durable and capital goods orders data. Last month’s pending home sales data follows this and we close with the Kansas City Fed manufacturing activity index reading. Earnings wise today we’ve got 52 S&P 500 companies set to report with the highlights being Amazon (after-market), Caterpillar (before the open), Microsoft (after-market) and Ford Motor (before the open).