Futures Sink To Session Lows, Europe Slides Following Chinese RRR Hike Confusion, Brexit Concerns

Not even this morning's mandatory European open ramp has been able to push US equity futures higher, and as a result moments ago the E-mini hit session lows on rising concerns about Brexit as talks drag on in Brussles, but mostly as a result of overnight confusion about China's loan explosion and whether the PBOC has lost control over its maniacally-lending banks.

The biggest news overnight, in addition to the endless Brexit negotiations, was a report that the PBOC will hike RRR-rates on some banks, a move that may contain credit growth after advances by smaller lenders jumped in January. It also suggests that any incremental easing in China may be off the table for some time.

As a reminder, following January's CNY3.42 trillion surge in Total Social Financing, one estimate showed that February is already run-rating at roughly the same number, suggesting a total credit injection in the first two months of roughly $1 trillion. It is this surge that has apparently spooked the PBOC. 

The central bank said in a Friday statement that some banks no longer meet criteria for preferential reserve requirement ratios and will have those levels increased. Prior to the announcement, Bloomberg News reported that some lenders will face a higher ratio as officials seek to limit the risks associated with last month’s jump in credit. The PBOC said its action wasn’t driven by the speed of lending.

A notable item is that the collective loan market share for ICBC, China Construction Bank, Agri Bank and Bank of China dropped to 20% last month from almost 40% in December, the figures show. This suggests that China’s four biggest banks weren’t the driving force behind last month’s credit binge. Small- and medium-sized lenders extended a combined 1.45 trillion yuan ($222 billion) of the new loans in January, accounting for 60 percent of the total increase.

While big banks are showing caution, smaller banks “are desperate to lend,” said Mu Hua, a Guangzhou-based analyst at GF Securities Co. “I just can’t figure out where would they find so many good projects to lend to. That’s probably raising some red flag to the central bank.”

What was truly bizzare is that between the first Bloomberg report and the subsequent PBOC confirmation, PBOC governor Zhou Xiaochuan said during a forum in Beijing that he "didn’t hear about" raising reserve-ratio rate for some banks, China Business News reported, opening up questions about just what is going on with monetary policy in China and who is making the decisions.

As a result of this PBOC confusion, US equity futures' attempt to stage an overnight breakout failed, and the E-mini was trading down 9 points sessions lows at 1906 moments ago, while stocks in Europe and Asia trimmed weekly gains as oil fell for the first time in three days, denting optimism that this year’s rout in commodities was easing: as of this moment the European Stoxx 600 was down precisely 1.1%, while Spain's IBEX was down 2%.

As Bloomberg adds, a global equities gauge fell for the first time in six days, bringing to an end a rally fueled by the first signs that producers may consider steps to rein in a record crude glut. Friday’s drop in energy prices dragged the Bloomberg Commodity Index lower even as industrial metals rose. Britain’s pound declined as David Cameron negotiated with European Union leaders over the U.K.’s membership of the bloc, while German bonds rose. The yen strengthened against all of its 31 major peers, with the biggest gains coming versus Asian counterparts.

“It’s a bumpy stabilization on oil, currency, spreads and equities,” said Didier Duret, who oversees about $219 billion as chief investment officer of ABN Amro Bank NV’s wealth-management unit. “The tail of energy has moved the psychology of the market.”

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Looking at regional markets, we start in Asia, where stocks declined following from the negative lead from Wall St where stocks snapped a 3-day gain as oil weakness dampened sentiment. This saw the energy sector underperform across the region with the ASX 200 (-0.79%) further pressured by poor results from Santos. Nikkei 225 (-1.42%) is the laggard amid JPY strength, while the Shanghai Comp (-0.1%) saw indecisive trade as participants, however fell late in Asian trade amid source reports that the PBoC is said to have increased RRR for banks that bolstered lending too fast following the record lending data in China. 10yr JGBs tracked the gains seen in UST's as the risk off sentiment globally spurred demand for safe-haven assets.

As noted above, the PBoC stated it has reviewed banks regarding RRR cuts, with some banks not meeting standards on targeted RRR cuts and as a result cannot enjoy the preferential RRR ratios beginning Feb 25th. This comes after PBoC's Governor Zhou denied knowledge of source reports that the central bank have increased RRR for banks that bolstered lending too fast.

Asian stocks fall with the Kospi outperforming and the Nikkei 225 underperforming; The Nikkei 225 -1.4%, Hang Seng -0.4%, Kospi +0.4%, Shanghai Composite -0.1%, ASX -0.8%, Sensex +0%; 2 out of 10 sectors rise with utilities and health care outperforming and energy and consumer discretionary underperforming.

European markets have seen somewhat of a Friday lull so far, with newsflow particularly light and much of the price action relatively range bound. Price action has been somewhat guided by WTI and Brent futures, which both saw a bid in early European trade to retrace some of the losses in the wake of yesterday's DoE inventories. As such WTI Apr'16 futures rose to test USD 33.00/bbl but failed to make a firm break and as such have come off their best levels in recent trade.

The Stoxx Europe 600 Index slid 0.5 percent at 11:14 a.m. London time, after rising as much as 0.3 percent. While the equity benchmark was set for a 4.7 percent gain this week, it’s still down more than 10 percent this year amid concerns ranging from global growth and the deepening oil slump, to the creditworthiness of lenders and dissipating faith in central-bank support.

Bunds have also been relatively range bound today, trading modestly higher after closing the opening gap shortly after the Eurex open, with little price action seen in the periphery. Additionally, analysts at Mizuho note that increase in average duration of EGB indexes this month-end will be a large 0.13yrs, which should be supportive for cash bonds. They also state that Austria, Italy and France will be the main beneficiaries from extension flows

"We remain reasonably confident that Europe can avoid a major macro slowdown, but current market pricing suggests otherwise.”, UBS says in note. “The markets seem to have taken a more negative view than we have on the severity of problems in the financial sector and their likely fallout on the European credit channel. The markets also seem to suspect that the ECB is running out of options to lift the economy."

In commodities, West Texas Intermediate crude slipped 1.8 percent to $30.21 a barrel after rising the past two days on statements by the Saudis, Russians and Iranians. Brent fell 1.8 percent to $33.67.

U.S. crude stockpiles rose by 2.15 million barrels to 504.1 million last week, according to the Energy Information Administration. That’s the highest level in EIA data going back to 1930. In another sign of the glut, supplies at Cushing, Oklahoma, the biggest U.S. oil-storage hub, rose to a record 64.7 million barrels. The site, which is the delivery point for WTI, has a working capacity of 73 million, according to the EIA.

Gold lost 0.6 percent to $1,223.93 an ounce after posting a two-day, 2.5 percent jump. Copper rose 0.3 percent to $4,589 a metric ton while zinc, aluminum, tin and lead all gained more than 1 percent. Zinc is poised for its first five-week run of gains since last May and nickel is set for its biggest weekly increase since May 2014.

In FX, all the action has been in GBP this morning, with the UK retail sales numbers adding event risk to the overhang of the EU summit this morning. Early reports of selling vs the SEK fed through Cable, knocking the latter spot rate from 1.4335-40 levels down to just below 1.4300. Strong buying resumed ahead of the consumer numbers, but despite a strong read, the lack of upside progress saw the intra market turn tail to send Cable back to new lows on the day. Elsewhere, CAD and the rest of the Oil related currencies remain on the back foot, though Oil prices are relatively stable, albeit at lower levels. Euro bourses and S&P futures pretty flat on the day, helping to support USD/JPY off the earlier lows, but the heavy tone is clear to see. AUD on the back foot also, though finding some support below .7100.

The key event in the US January will be January's CPI print where current expectations are for a -0.1% mom headline and +0.2% mom core readings which would take the YoY rates to +1.3% (up-six tenths from December) and +2.1% (unchanged versus December) respectively. In terms of Fedspeak we are due to hear from Mester at 1.30pm GMT on her economic outlook. EU leaders are also set to conclude their summit in Brussels (with Brexit discussions high on the agenda) while the ECB’s Constancio is due to speak this afternoon.

Bulletin Headline Summary from RanSquawk and Bloomberg

  • European stocks trade broadly in negative territory in what has been somewhat of a quiet end to the week.
  • UK retail sales beat expectations across the board, however downward revisions sees GBP pressured, while participants keep a close eye on the EU summit for any developments regarding Brexit talks.
  • Looking ahead, highlights include US CPI, ECB's Draghi (Soft Dove) and Fed's Mester (Voter, Soft Hawk)
  • Treasury yields mostly steady overnight as global equity markets and oil lower; CPI and average weekly earnings reports to be released at 8:30am ET.
  • Central banks embrace negative rates that economists scorn as just 27% of respondents in a Bloomberg survey say negative rates will help the BOJ boost feeble inflation and only 42% say the policy is succeeding in the euro area
  • U.K. retail sales surged the most in more than two years in January, boosted by demand for clothing and computers. The 2.3% jump in the volume of sales was almost three times the pace of growth forecast by economists in a Bloomberg survey
  • David Cameron pleaded for a deal on the U.K.’s EU membership that he can sell to British voters. The prime minister ran into resistance from eastern European states over demands for more welfare curbs on non-British citizens
  • Wall Street’s biggest banks boosted their Treasury holdings to the highest level in more than two years, and one of them says that’s a warning sign for the market
  • China’s central bank said some banks will be forced to lock away more reserves, a move that may contain credit growth after advances by smaller lenders jumped in January
  • Milan prosecutors are probing whether Credit Suisse engaged in money laundering and evaded taxes when it sold billions of euros of insurance policies that clients from Italy used to shield funds from tax authorities
  • In a secret meeting convened by the White House around Thanksgiving, senior national security officials ordered agencies across the U.S. government to gain access to the most heavily protected user data on the most secure consumer devices, including Apple’s iPhone
  • $8.1b IG corporates priced yesterday (YTD volume $221.45b) and $1b HY priced yesterday (YTD volume $11.125b)
    Sovereign 10Y bond yields mostly lower led except Greece (+11bp); European, Asian markets mostly lower; U.S. equity- index futures mixed. Crude oil and gold drop, copper higher

US Event Calendar

  • 8:30am: CPI m/m, Jan., est. -0.1% (prior -0.1%)
    • CPI Ex Food and Energy m/m, Jan., est. 0.2% (prior 0.1%, revised 0.2%)
    • CPI y/y, Jan., est. 1.3% (prior 0.7%)
    • CPI Ex Food and Energy y/y, Jan., est. 2.1% (prior 2.1%)
    • CPI Index NSA, Jan., est. 236.606 (prior 236.525)
    • CPI Core Index SA, Jan., est. 244.808 (prior 244.446, revised 244.516)
    • Real Avg Weekly Earnings y/y, Jan. (prior 1.6%, revised 1.7%)
  • 8:30am: Fed’s Mester speaks in Sarasota, Fla.

DB's Jim Reid concludes thes overnight wrap

With newsflow taking a bit of a breather, there hasn’t been a lot to drive markets over the last 24 hours or so. US equity markets in particular saw the strong 3-day rally come to a bit of a stuttering and unspectacular end yesterday. Some bleak Wal-Mart numbers certainly weighed on the retail sector, while the latest swing in the daily oil rollercoaster moved from hope around the Iran and Saudi Arabia/Russia production meetings back to the reality of the current fundamental picture following the latest set of bearish US crude inventory numbers. WTI was up as high as $32/bbl prior to the data and the highest in 9 days, before paring the bulk of the day’s gains to close at $30.77/bbl after data showed that crude stockpiles extended an 86-year high in the US. The S&P 500 eventually closed -0.47% while in Europe we saw the Stoxx 600 (+0.04%) finish pretty much unchanged having got off to a reasonable start prior to that oil data. Peripherals (IBEX -0.83%, FTSE MIB -1.53%) were notable under-performers though.

Away from this, various US economic surprise indicators improved again yesterday with both initial jobless claims (262k vs. 275k expected) and the Philly Fed manufacturing index (-2.8 vs. -3.0 expected) ahead of expectations. The improvement in the four-week moving average for claims to 273k (from 281k) in the NFP survey week was seen as particularly positive although the details in the breakdown of the Philly Fed data was less so. Prices paid (-2.2 vs. -1.1 previously), new orders (-5.3 vs. -1.4), inventories (-17.1 vs. -15.7) and number of employees (-5.0 vs. -1.9) in particular increase the risk that the next manufacturing ISM survey remains in contractionary territory when we receive the latest data in a couple of weeks.

US Treasury yields marched lower across the curve although the moves were essentially tracking the fall in oil from mid-afternoon. The benchmark 10y finished 8bps lower at 1.740% and is back to more or less where it closed last week. Credit markets reflected the lack of direction with indices in the US finishing flat, while weakness in European financials (iTraxx Senior +4bps, Sub +6bps) drove Main and Crossover 2bps and 4bps wider. Reassuring however was another strong day of primary across the pond with over $8bn of deals said to have priced. This shows that there is still demand for the asset class in spite of everything thrown at it of late. Elsewhere Anglo American, which has been in the news a fair bit this week, came out with a bond buyback announcement which helped sentiment for the asset class.

Refreshing our screens this morning, it’s looking like a bit of a mixed ending to the week for markets in Asia. After a strong week, bourses in Japan are ending on a down note with the Nikkei and Topix -1.43% and -1.47% respectively. The ASX (-0.79%) is also lower however there’s a modest gain for the Kospi (+0.31%) while bourses in China are flat. Oil markets are down around half a percent while credit indices are generally a tad wider. As we go to print Bloomberg headlines are suggesting that the PBoC is to raise the required reserve ratio for some banks having determined that some had increased lending too quickly with regional banks said to be targeted. One to keep an eye on as more details emerge.

In terms of the rest of the economic data yesterday, in the US the Conference Board’s leading index revealed an as expected -0.2% mom decline last month to mark the second consecutive negative monthly reading. Prior to this in France we saw no change to the final January CPI print of -1.0% mom with the YoY staying unchanged at a lowly +0.2%. Yesterday’s ECB minutes didn’t offer a whole lot new with the text revealing that the governing council was unanimous that policy ‘needed to be reviewed and possibly reconsidered’ at the March meeting, although there were some hints from certain policymakers that it would be ‘preferable to act pre-emptively’ rather than ‘wait after risks had fully materialized’.

Over at the Fed the latest set of comments came from San Francisco Fed President Williams who stuck to his view that ‘a gradual pace of policy normalization as being the best course’. Williams said that the US economy ‘still needs a gentle shove’ from monetary policy headwinds but that the economy is ‘all in all, looking pretty good’. On the popular topic of negative rates, Williams said that the chances of the Fed cutting rates below zero were ‘very remote’.

Before we look at today’s calendar, the OECD became the latest agency to cut global growth forecasts yesterday. The think-tank now see’s the world economy growing by 3% this year which is three-tenths lower than its previous forecast three months ago and the same pace as 2015. That included a five-tenths downgrade to its US forecast to 2% this year while China is expected to grow 6.5%. The biggest revision was reserved for Brazil however, who the agency expects to contract 4% this year, a downward revision of 2.8 percentage points.

Looking at today’s calendar, this morning in Europe the early data is out of Germany where we’ll see the January PPI numbers. That’s closely followed by UK retail sales covering the month of January where expectations are for a relatively robust +0.7% mom print excluding fuel. UK public sector net borrowing data is also expected. In the US this afternoon much of the focus will be on the January CPI print where current expectations are for a -0.1% mom headline and +0.2% mom core readings which would take the YoY rates to +1.3% (up-six tenths from December) and +2.1% (unchanged versus December) respectively. In terms of Fedspeak we are due to hear from Mester at 1.30pm GMT on her economic outlook. EU leaders are also set to conclude their summit in Brussels (with Brexit discussions high on the agenda) while the ECB’s Constancio is due to speak this afternoon.