Global Markets Stunned By Biggest Japan Crash Since 2013; All Eyes On Deutsche Bank

With China offline for the rest of the week, global markets have found a new Asian bogeyman in the face of Japan which as reported last night saw its markets crash, and the Yen soar, showing that less than 2 weeks after the BOJ unveiled NIRP, yet another central bank has lost control.

 

The Nikkei crashed 5.4%, the biggest drop since June 2013, plunging over 900 points to August 24 lows driven by collapsing bank stocks while the Yen soared to 114.50 overnight before the BoJ desperately tried to push the Yen lower, with London dealers reported the Japanese central bank was checking rates and levels to prompt short covering through 115.

 

But while the BOJ failed to push up equities, it certain managed to launch a panic buying spree in JGBs, which as also reported finally saw the 10 Year Japanese TSY slide into negative yield territory, thus boosting the global number of bonds with a negative yield to just shy 30% of total or roughly $7 trillion!

Aside from Japan, everyone is looking at the bank which we first asked if it was "the next Lehman" last June, namely Germany's Deutsche Bank, to see if yesterday's desperate scramble to publicly confirm it has sufficient liquidity will sufficient will stop the price from dropping and its CDS drom blowing out. For now, the stock is indeed up modestly, even if the CDS has refused to tighten suggesting that whatever management did, it is not enough and it is only a matter of time before the selling returns.

As a result of this temporary stabilization in financials, the Europe 600 Index was little changed after closing Monday at its lowest level since 2014, and U.S. equity-index futures were also steady. European indexes of credit-default swaps on corporate debt fell for the first time in more than a week, Germany’s 10-year bund yield climbed the most this year and crude in New York rose above $30 a barrel. Equities in Tokyo slumped earlier by the most since August and the yield on 10-year Japanese government bonds turned negative for the first time.

"Volatility is getting very high,” Guillermo Hernandez Sampere, head of trading at MPPM EK in Eppstein, Germany told BLoomberg. “Investors need to increase their cash and be careful in case they see any buying opportunities. A technical rally may easily get sold again, we won’t come back to calm waters soon.”

While oil took on secondary importance during yesterday's financial-led rout, expect algos and even human traders to pay more attention to crude today after the latest IEA monthly reported predicted supply will exceed demand by an avg of 1.75m b/d in 1H, compared w/ fcast of 1.5m last month.  “With the market already awash in oil, it is very hard to see how oil prices can rise significantly in the short term. In these conditions the short term risk to the downside has increased,” IEA says. It added that the global oil demand fcast for 2016 100k b/d lower than previous mos. report at 95.6m b/d. Elsewhere, Goldman once again warned that oil may drop into the teens as land storage capacity is exhausted.

Looking at today's calendar, it’s another fairly quiet session for data in Europe this morning with the only releases of note being the December trade numbers out of the UK and Germany along with the latest industrial production data in the latter. Over in the US the early release is the NFIB small business optimism survey for January, followed by the December JOLTS job openings and wholesale trade sales and inventories data. As a reminder, JOLTS data is released with a one-month lag so the data will be reflecting what was a bumper month for hiring (payrolls +262k) in December and not reflective of the recent softer payrolls number. Earnings wise we’ve got 18 S&P 500 companies set to report including Walt Disney and Coca-Cola.

Market Wrap

  • S&P 500 futures down 0.4% to 1844
  • Stoxx 600 down 0.6% to 312
  • DAX down 0.5% to 8926
  • German 10Yr yield up 5bps to 0.27%
  • Italian 10Yr yield up 1bp to 1.69%
  • Spanish 10Yr yield up less than 1bp to 1.76%
  • MSCI Asia Pacific down 2.9% to 118
  • Nikkei 225 down 5.4% to 16085
  • S&P/ASX 200 down 2.9% to 4832
  • US 10-yr yield up 1bps to 1.76%
  • Dollar Index down 0.06% to 96.52
  • WTI Crude futures up 2.0% to $30.29
  • Brent Futures up 2% to $33.54
  • Gold spot down 0.1% to $1,188
  • Silver spot up less than 0.1% to $15.32

Top Global News

  • Michael Bloomberg Tells FT He’s Considering Run for President: tells FT he’s “looking at all the options”
  • IEA Raises Estimate of Surplus Oil Supply on Higher OPEC Output: Excess seen at 1.75m barrels a day in 1H
  • Japan Joins German Bond Wonderland as Yields Below Zero the Norm: Lower borrowing costs come at expense of resurgent yen
  • Renzi Is Betting on Cameron, Sees Anti-‘Brexit’ Deal Soon: Italian premier says proposed changes ‘a good compromise’
  • Google, Apple Face Kremlin Tax Fire for ‘Milking’ Russia: Google’s reach considered national security threat to Russia
  • Deutsche Bank Says It Can Pay Coupons in Sign Jitters Mount: Lender is due to pay about EU350m in April
  • AIG Said to Plan Exit From at Least Half of Hedge Fund Positions: Insurer said to limit to 50 funds or fewer, from more than 100
  • Japan Fund Said to Pitch Sharp on Plan for Smart Appliance Giant: INCJ sets aside 100b yen as acquisition war chest

A quick look at regional markets, we start in Asia where stocks picked up where global equities left off as the newly added woes triggered by Deutsche Bank has seen the financial sector deflate the Asia-Pac region. In turn, the Nikkei 225 (-5.4%) bared the brunt of the risk-off sentiment, with banks in the region feeling the squeeze, whilst a firmer JPY saw the bourse fall over 900 points. Elsewhere, ASX 200 (-2.9%) could not escape the reach of the downbeat tone as the index was also pressured by financials, which accounts for nearly half of the total composition of the bourse. JGBs were bolstered by the dampened sentiment sparking flight-to-quality trade, with yields across the curve yet again falling to record lows, additionally Japanese 10yr yields are now the first among the G7 nations to go negative.

Asian Top News

  • Yen Jumps to 2014 High as Japan 10-Year Yield Drops Below Zero: Yen rose against all 31 major peers as Topix tumbled 5.5%, 10 yr yield fell unprecedented decline below zero
  • Credit Risk Soars From Japan to Australia on Global Bank Anxiety: Credit-default swap costs in Japan, AU soared amid markets across much of Asia Pacific closed for Lunar New Year
  • Beefing Up Down Under: Aussies Find New Boom in China Demand: Aussie beef sales to China surged six-fold in 3 yrs to a record A$917m in 2015; export boom signals AU is successfully transitioning away from mining
  • India State Firms’ Valuation Discount May Trigger Rebound: Chart; Shrs of India’s state-run cos are cheapest in more than two yrs relative to stocks on nation’s benchmark index

Fears over the European banking sector linger in markets this morning and European equity markets have seen choppy price action since the open. Initially led lower by the Nikkei 225 closing lower by over 5%, equities have since trended higher after in vogue Deutsche Bank stated that that their 2016 payment capacity is enough to finance their AT1 payment. As a result, the German heavyweight provided some reprieve for Europe, with the iTraxx Sub Financial index, an index tracking the value of CDS's, moving in sympathy with Deutsche and tightening by 19bps. The same cannot be said for Credit Suisse (-3.7%) however, the Swiss bank is continuing to suffer from its poor earnings reported last week and questions surrounding the banks' ability to a large fine.

European Top News

  • Primonial-Led Group Buys Gecina Health Assets for $1.51b: Deal to be completed mid-2016
  • Swedbank CEO Ousted by Board as Permanent Replacement Sought: Michael Wolf, 52, will be replaced by Birgitte Bonnesen as acting CEO
  • TUI Turkish Bookings Plunge as Vacationers Seek Safer Spain: Turkey summer reservations tumble 40% after January attack
  • Vestas Wind Raises Dividend Predicting Record Sales After Boom: sees EU9b of sales in 2016, 11% margin
  • Vestas CEO Says He Has ‘No Intention’ of Bidding for Gamesa
  • Pound Seen Tumbling Whether U.K. Stays in EU or Seeks ‘Brexit’: Biggest bears’ forecasts aren’t contingent on U.K. quitting
  • Sanofi Says Profit Won’t Grow as Bestseller Lantus Fades: Lantus sales drop amid biosimilar competition in Europe
  • Tesco Sales Drop Eases as U.K. Grocery Leader Begins Turnaround: Kantar data suggests customers may be returning
  • Pandora Forecasts Slower Sales Growth on Trimmed Expansion Plans: Sales this year will rise at least 14% to 19b kroner in 2016, vs growth rate of 40% last year
  • Securitas 4Q EPS Misses Ests.; Dividend Raised: 4Q EPS SEK1.83 vs est. SEK1.98
  • Handelsbanken Profit Rose Less Than Estimated in Fourth Quarter: Loan losses greater than expected, increased costs

In FX, Once again it was an early London session left to provide some stability in the markets, and in FX improved liquidity levels naturally help. USD/JPY lows in Asia bottomed out at 114.22, but dealers reported the BoJ checking rates and levels to prompt short covering through 115.00, though 115.50 has proved an obstacle since. EUR/USD continues to trade in the opposite direction, but it is a little too early to suggest the 1.1236 highs are the top of the move. The commodity currencies take a back seat as Oil stabilises and Gold now a safe haven. USD/CAD is still holding off 1.4000, while AUD is propped up ahead of .7000. GBP posted fresh 1 year lows against the EUR ahead of .7800, but has retraced in line with EUR/USD. Cable pivoting on 1.4400 for now. EUR/CHF now just under 1.1000 as CHF naturally benefitting in current climate.

Looking at commodities, oil took a back seat in yesterday's trade, however has quietly ticked higher in Europe, with WTI Mar'16 futures comfortably holding the USD 30.00 handle and as such the energy sector is one of the better performers in Europe. However a note from Goldman Sachs saying that oil could oil prices 'go into the teens', may cause oil bulls some anxiety.

As North American participants come to their desks the yellow metal has dipped below the USD 1900/oz level, finding a tight range following yesterday's stock-market rout inspired gains. Of note, Goldman Sachs have said they are not buying into the recent rally, as they still foresee three fed hikes this year, driving the price of gold down to around USD 1000/oz by year end

Bulletin Headline Summary From RanSquawk and Bloomberg

  • In a choppy session, Deutsche Bank (+1.3%) trades higher in Europe after stating stated that that their 2016 payment capacity is enough to finance their AT1 payment
  • Once again it was an early London session left to provide some stability in the markets, and in FX improved liquidity levels naturally help
  • Today's highlights include: US JOLTS job openings and Wholesale inventories, as well as comments from ECB's Linde
  • Treasuries lower in overnight trading before week’s note auctions begin with $24b 3Y notes, WI 0.845% vs 1.174% in Jan., was first 3Y to stop through by more than 1bp since Aug. 2011.
  • Deutsche Bank, under pressure over its ability to pay coupons on the riskiest debt, reassured investors that it has sufficient funds after the shares plunged the most in almost seven years, eroding almost €2 billion ($2.2 billion) in market value
  • European banks have “ample liquidity,” with deposits flowing in and higher capital buffers, reducing the risk of repeating the financial crisis, according to Goldman Sachs
  • Central banks’ ultra-loose monetary policy is putting the world economy at risk, said William White, a senior adviser to the Organization for Economic Cooperation and Development
  • The yield on Japan’s benchmark 10Y bond fell below zero for the first time, an unprecedented level for a G7 economy, as global financial turmoil and the Bank of Japan’s adoption of negative interest rates drive demand for the notes
  • The Federal Reserve may not have the legal authority to set negative interest rates in the U.S., according to a 2010 staff memo that was posted late last month on the central bank’s website
  • Oil could drop below $20 a barrel as the search for a level that brings supply and demand back into balance makes prices even more volatile, Goldman Sachs predicted
  • The global oil surplus will be bigger than previously estimated in the first half, increasing the risk of further price losses, as OPEC members Iran and Iraq bolster production while demand growth slows, according to the IEA
  • German industrial production unexpectedly fell for a second month in December, a sign that a slowdown in major export markets is holding back factory activity despite strong domestic demand
  • President Obama will send a fiscal 2017 budget of ~$4 trillion to the Republican-controlled Congress on Tuesday representing his aspirations for the future of the U.S. Little of it, as the Obama administration acknowledges, will become law anytime soon
  • No IG corporates (YTD volume $181.575b) and no HY (YTD volume $9.015b) priced Friday
  • BofAML Corporate Master Index OAS 4bp higher yesterday at +213 (highest since July 2012), +11bp MTD, +40bp YTD; T1Y range 213/129
  • BofAML High Yield Master II OAS 41bp higher yesterday at +851 (highest since Oct. 2011), +74bp MTD, +156bp YTD; T1Y range 851/438
  • Sovereign 10Y bond yields mixed with Greece +27bp, Portugal +13bp. European stocks mixed, Asian stocks lower (China closed for holiday); U.S. equity-index futures drop. Crude oil rises, copper, gold fall

US Event Calendar

  • 6:00am: NFIB Small Business Optimism, Jan., est. 94.5 (prior 95.2)
  • 10:00am: JOLTS Job Openings, Dec., est. 5.413m (prior 5.431m)
  • 10:00am: Wholesale Inventories, m/m, Dec., est. -0.2% (prior -0.3%)
  • Wholesale Trade Sales, m/m, Dec., est. -0.4% (prior -1%)
  • 11:30am: U.S. to sell $55b 4W bills
  • 1:00pm: U.S. to sell $24b 3Y notes

DB's Jim Reid concludes the overnight wrap

Onto the latest in Asia this morning now where bourses in Japan and Australia are extending much of yesterday’s turmoil. It’s the moves in Japan which have been more eye-catching with the Topix and Nikkei currently -5.71% and - 5.58% and moving lower as we go to print. In Australia the ASX is -2.88%. Credit markets have taken a big hit in the region with iTraxx Japan and Australia indices both +10bps wider. Meanwhile 10y JGB’s have crossed into negative territory this morning and plummeted to fresh record lows. The benchmark maturity is down over 3bps in early trading and currently sitting at -0.022%. That’s despite another strong performance for the Yen, currently up over 1% and in the process reaching a 15-month high and extending the incredible run since the BoJ cut rates to negative. Oil is hovering around the $30/bbl mark while US equity futures are down around 1% as we refresh our screens.

Moving on. The latest DB TheHouseView titled “Still deep in the woods” came out overnight. The team notes that in addition to the initial concerns about China and energy, two new issues are further weighing on risk sentiment: the slowdown in US growth momentum and the tightening of financial conditions especially in European financial credit. Their macro outlook for 2016 is broadly unchanged so far, uninspiring but not a disaster, but they note that downside risks have risen both in the US and in Europe. Until US growth, European financial conditions, China and oil concerns are put aside, markets will remain volatile and a sustained change in risk appetite is difficult.

In truth yesterday was dominated by the moves for European financials with very little newsflow or data elsewhere to drive markets. The latter was largely secondary in nature. In Europe we saw the Sentix investor confidence reading for the Euro area decline 3.6pts this month to 6.0 (vs. 7.4 expected). Meanwhile in the US the labour market conditions index was softer than expected last month at 0.4 (vs. 2.0 expected), a fall of 1.9pts relative to December.

Unsurprisingly safe-havens dominated the few asset classes which actually saw gains yesterday. Of particular note was the move for Gold which finished up +1.35% for its fourth consecutive daily gain of at least 1%, with the metal at one stage trading up through $1200/oz for the first time since June last year. Meanwhile core sovereign bond yields marched lower. 10y Bunds finished just shy of 8bps lower at 0.216% and the lowest since April last year when the yield closed at a record low 7.4bps at one stage. Other core European bond markets saw similar moves while the peripherals sold off with Italy, Spain and Portugal +12.3bps, +10.7bps and +25.3bps wider respectively. 10y Treasury yields (-8.7bps) closed at the lowest in 12-months meanwhile at 1.749% (and have marched lower this morning, testing 1.7% to the downside) while the probability of the one Fed rate hike this year has quickly plummeted back towards 30%.

Before we move onto today’s calendar, one interesting highlight from the ECB’s Coeure yesterday was the reference to potential coordination on emerging market currencies. In an interview with French press, Coeure suggested that a further depreciation for EM currencies is possible and that ‘that’s an issue for global coordination’ which will be discussed at the G20 finance ministers meeting in Shanghai in 10 days time.

Looking at the day ahead now, it’s another fairly quiet session for data in Europe this morning with the only releases of note being the December trade numbers out of the UK and Germany along with the latest industrial production data in the latter. Over in the US the early release is the NFIB small business optimism survey for January, followed by the December JOLTS job openings and wholesale trade sales and inventories data. As a reminder, JOLTS data is released with a one-month lag so the data will be reflecting what was a bumper month for hiring (payrolls +262k) in December and not reflective of the recent softer payrolls number. Earnings wise we’ve got 18 S&P 500 companies set to report including Walt Disney and Coca-Cola.