After yesterday's last hour selloff sent the S&P to the very edge of the critical support trendline which, as shown yesterday, meant 1980 had to be defended at all costs...
... so far the support has held, and in overnight trading European stocks have managed to rebound on the back of more levitation in oil, while US equity futures have ignored a drop in the USDJPY which touched 112.20 in morning trading, and have jumped by 0.5% as of this moment, up 10 points to 1,990.
It is worth noting that China opened on the wrong foot, with the Yuan feeling the pain of the recent abysmal trade data, however, after dropping as much as 3%, Chinese stocks managed to crawl back to the highs of the day following another dramatic intervention by the Chinese government's "National Team":
With China's Plunge Protection Team having intervened and set a positive spin on another poor session, traders put declines in Asia behind them as European markets rose along with U.S. index futures and commodities. European shares advanced for the first time in three days on speculation the region’s central bank will ramp up monetary stimulus on Thursday. A gauge of raw materials rebounded from its biggest selloff in a month, buoyed by gains in oil and copper. Furthermore, the previously noted selloff in Japanese government bonds - one which triggered circuit breakers and which some speculated may have been precipitated by the BOJ itself - dragged Treasuries and German bunds lower, gold fell a second day and the euro dropped versus most of its major peers.
Because the last thing the market needs is negative follow through the day after Jeff Gundlach says that the rally is ending and the the risk/return profile of the S&P is currently 2/20.
To be sure, everyone's attention will be focused on tomorrow's ECB, where Draghi will either provide a major upside surprise, or will disappoint massively to the downside: just like in December, there is no middle ground. "We think a 10bp cut and a EU10b top-up in QE purchases won’t do much to extend the equity rally, namely because it’s already priced in. A very generous macro add-on to the two-tiered system would possibly help lenders in the very short term, but realistically, it’s only the threat of credit purchases, corporate and/or financial, that can get the market excited at this point. Even if Draghi pulls another rabbit, the fundamental picture for European banks will remain extremely challenging given the grim outlook for back-end yields,” Ben Camara, head of European strategy at Vanda Securities, writes in note.
Others are just as skeptical: “There’s talk of rates cuts, increasing the size of the asset-purchase program, and expanding the range of products that the ECB will buy,” said Daniel Murray, the London-based head of research at EFG Asset Management. “Let’s see tomorrow how good Draghi is at playing the market: he has built up expectations before and found them hard to meet.”
So while we await the week's key event, here is where we stand currently.
- S&P 500 futures up 0.5% to 1990
- Stoxx 600 up 1.0% to 341
- FTSE 100 up less than 0.5% to 6155
- DAX up 0.5% to 9744
- German 10Yr yield up 2bps to 0.2%
- Italian 10Yr yield down less than 1bp to 1.42%
- Spanish 10Yr yield down less than 1bp to 1.57%
- MSCI Asia Pacific down 0.3% to 125
- Nikkei 225 down 0.8% to 16642
- Hang Seng down less than 0.1% to 19996
- Shanghai Composite down 1.3% to 2863
- S&P/ASX 200 up 1% to 5157
- US 10-yr yield up 5bps to 1.88%
- Dollar Index up 0.13% to 97.34
- WTI Crude futures up 1.5% to $37.04
- Brent Futures up 1.7% to $40.33
- Gold spot down 0.5% to $1,253
- Silver spot up 0.1% to $15.37
Top Global News
- Sanders Stuns Clinton with Michigan Upset: Even with loss, Clinton was able to go to sleep Tuesday with a bigger overall lead than she had when she woke up; Trump Sweeps Republican Primaries in Mississippi, Michigan
- Swiss Re Said to Be in Talks to Buy Prime Reinsurance From Citi: Deal may value the subsidiary at ~$500m.
- SunEdison Faces Lawsuits, Cash Crunch After Vivint Cancels Deal: Now that deal has fallen apart, fallout may be significant.
- Carmike’s Biggest Holder Opposes AMC Buyout Terms as Too Low: Co. responded that it’s pressing ahead with proposed deal.
- Berkshire Said to Market Euro Bonds Following Biggest Debt Sale: Co. offering 4, 8, 12-yr maturities, partly to help pay off loans used in acquisition of Precision Castparts.
- IBM Snips Potential Share Buyback Benefits for CEO Compensation: Co. to strip out effects of “unplanned” repurchases from oper. EPS when it assesses CEO’s performance.
- India Startup Cut Off From Facebook After U.S. Rival’s Protest: FB pulled plug on Houzify page after Sequoia Capital-backed Houzz Inc. complained of trademark infringements.
- Copper Demand to Overtake Supply in 2017: Freeport Official: Demand will increase slightly over 2%/year on average through 2020.
- Chipotle Closes Mass. Restaurant After Workers Get Sick: Location in Billerica, outside Boston, was closed for a full cleaning.
- Google AI Wins First Match Against Korean Go Game Champion:
Bulletin Headline Summary From RanSquawk and Bloomberg
- European bourses are trading mildly higher despites risk events being in focus, most notably ECB's Draghi speaking tomorrow after the ECB rate announcement.
- Brent crude oil has once again reached USD 40/bbl today with WTI following slightly below at USD 37/bbl respectively despite a build in API inventories, with DOE Crude Oil Inventories expected to come in at 2000k.
- Looking ahead: Bank of Canada Rate Decision, DOE Crude Oil Inventories and RBNZ Official Cash Rate.
- Treasuries lower in overnight trading; equity markets mostly lower in Asia, rise in Europe before tomorrow’s ECB meeting; week’s auctions continue with $20b 10Y notes, WI 1.87% vs 1.73% in Feb., was lowest 10Y auction stop since 1.652% in Dec. 2012.
- Current 10Y trading special in the repo market, -3.25% yesterday, a reflection of an increasing short base and shortage of the security, which the Fed cannot alleviate because it doesn’t hold much of the issue
- Mario Draghi is having no success convincing stock investors that the ECB has the firepower to reignite growth. In the first year of quantitative easing, the Euro Stoxx 50 Index fell 17%, and volatility reached levels not seen since 2008
- Norway’s sovereign wealth fund, the world’s biggest, hasn’t been part of a global selloff in stocks this quarter, according to its CEO, Yngve Slyngstad. The comments follow evidence that wealth funds across the Middle East and central Asia have sold assets to plug deficits amid plunging oil prices
- U.K. industrial production posted a modest rebound in January, climbed 0.3% from December, when it declined 1.1%, as manufacturing and energy production jumped, the Office for National Statistics said in London on Wednesday
- The Chinese stock market has once again turned into a battleground for bearish investors and state-directed funds determined to spark a rally
- China National Petroleum won’t cut frontline oil and gas workers as it seeks to reduce costs to cope with low energy prices, according to Chairman Wang Yilin. “We are not like international oil companies where layoffs are the most convenient way to cut cost in the capitalist world”
- Thousands of refugees piled up at the border between Greece and the Republic of Macedonia, unable to continue northward as regional authorities tightened controls before European Union leaders finalize an agreement to stem the flow of migrants
- Donald Trump beat back a barrage of attacks led by the last Republican presidential nominee and scored major victories over his leading rival in two primaries on Tuesday, strengthening his bid to win the party’s nomination
- Hillary Clinton was expected to sail to an easy victory in Michigan on Tuesday. Instead, she suffered a narrow yet stunning loss that has the potential to further slow her progress to the Democratic nomination
- Sovereign 10Y bond yields mixed, mostly steady; European, Asian markets mixed; U.S. equity-index futures rise. WTI crude oil, copper rise, gold falls
US Event Calendar
- 7:00am: MBA Mortgage Applications, March 4 (prior -4.8%)
- 10:00am: Wholesale Inventories m/m, Jan., est. -0.2% (prior -0.1%); Wholesale Trade Sales m/m, Jan., est. -0.3% (prior -0.3%)
- 10:00am: Bank of Canada overnight rate, est. 0.5% (prior 0.5%)
- 1:00pm: U.S. to sell $20b 10Y notes (reopen)
- 3:00pm: Reserve Bank of New Zealand overnight rate, est. 2.5% (prior 2.5%)
- 3:05pm: RBNZ’s Wheeler holds news conference, attends 6:10pm parliamentary hearing
Looking at regional markets, stocks in Asia traded mostly lower following the losses on Wall St. after weakness in crude and China concerns continued to dampen sentiment. Nikkei 225 (-1.17%) and ASX 200 (+0.78%) were initially pressured by declines in the commodity-complex, although the latter recovered losses, supported by defensive stocks. Chinese markets continued to underperform with the Shanghai Comp (-1.34%) lower following yesterdays poor trade data, while today's PBoC operation was a relatively paltry injection. 10yr JGBs declined on profit-taking following yesterdays advances with demand also subdued as participants searched elsewhere for positive yields. Further selling was also observed on resumption from the break due to disappointment from the BoJ's buying operations which saw 10yr JGBs decline by around 1 point and caused the OSE to issue a circuit breaker. PBoC set the CNY mid-point at 6.5106 vs. last close. 6.5046 (Prey. mid-point 6.5041); 1st time PBoC weakened the fix in 5 days. (RTRS) PBoC injected CNY 15bIn via 7-day reverse repos.
Top Asian News
- Hong Kong Plans to Uncloak Investors With New See-Through System: Watchdog plans to assign identity record to each investor trading in market.
- The China Intervention Trade Is Back as State Funds Battle Bears: Pattern of late-day rallies returns as Shanghai Composite Index heavyweights jump.
- China May Face Japan-Like Slump Unless Yuan Weakens, KKR Says: KKR sees currency’s ‘fair value’ at about 7 per U.S. dollar.
- PBOC Using Stealth Intervention as Reserves Decline, Daiwa Says: Central bank may have asked wealth fund to sell foreign assets, analysts say.
- Noble Group Said to Plan Biggest Loan Backed by Inventories: Commodities trader is seeking $2.5b in so-called borrowing base facility guaranteed by oil.
- Aramco Mulls Indian Refinery in Plan to Boost Asia Footprint: Saudi producer also looking at China, Indonesia, Malaysia.
- Cathay Pacific Profit Nearly Doubles as Fuel Costs Fall: Full-year net income jumps 90.5 percent from a year earlier
In Europe, participants appear somewhat on edge so far today ahead of the key ECB meeting tomorrow, however with some indications that risk on sentiment has not completely dissipated. Equities trade higher this morning (Euro Stoxx: +0.6%), with the defensive healthcare sector the session's laggard so far and financials & materials leading the way higher. This comes as materials pare back some of the heavy losses seen yesterday. Bunds remain heavy heading into the north American cross over although off their worst levels, partly in tandem with the downside observed in USTs, which fell following somewhat lacklustre buying op by the BoJ, with profit taking and positioning ahead of supply also noted as factors behind the move.
Top European News
- Banks Face Billions in Collateral Needs Under EU Swap Rules: May require EU buyers, sellers of swaps to set aside EU200m- EU420m once they are fully effective in 2020.
- Draghi Stimulus Fails in Stock Market as Volatility Matches 2008: In first year of quantitative easing, Euro Stoxx 50 Index fell 17%, with volatility reaching levels not seen since 2008.
- Norway’s Sovereign Wealth Fund Has Worst Year Since 2011: The $830b Government Pension Fund Global returned 2.7% in 2015, after rising 7.6% in 2014.
- Credit Agricole Seeks EU4.2b Annual Profit in 2019: Co. to seek EU900m in annual gross cost savings as it streamlines some businesses, invests in others.
- Prudential’s Pretax Profit Rises 19% as Asia Life Sales Grow: Co. will also pay special dividend of 10p.
- Altice Defends Cablevision Purchase as in NYC’s Interest: Subscribers could sign up for broadband service as fast as 300mbps, while low-income New Yorkers can get 30mbps plan for $14.99/month.
- Bank of France Cuts Growth Forecast as Business Confidence Falls: Sentiment among factory executives dropped to 98 in Feb. from 101 in Jan.
- Zara Owner Cuts Store Expansion Goal in Favor of Online Growth: Co., which has over 7,000 outlets, aims to increase retail space 6-8% in coming years, vs previous target of 8-10%.
- U.K. Industrial Output Rises on Manufacturing, Utilities: Output climbed 0.3% from Dec., vs forecasted gain of 0.4%.
In FX, there have been no big moves this morning, but notable was the fresh downturn in USD/JPY, testing the low 112.00's to hit fresh session lows and a return into the nervy 111.00 zone. Little behind the move apart from some cross JPY flow (EUR selling contributing), with the risk mood relatively positive after yesterdays losses. Elsewhere, UK industrial and manufacturing production data was mixed, but GBP has recovered a little, with EUR/GBP dipping below .7700 to give the Cable rate a lift back into the 1.4200's. Ahead of the ECB, we saw some early selling of EUR/USD, but this petered out pretty quickly, as the inverse correlation with USD/JPY took hold. AUD/USD is digging in to uphold the risk correlation, while the CAD is pushing higher again also as Oil resumes higher levels — WTI back through $37.0, Brent $40.0+.
In commodities, Brent crude oil has once again reached USD 40/bbl today with WTI following, slightly below at USD 37/bbl respectively with traders looking forward to the possibility of an oil producers meeting on the 20th March. Crude oil rose 1.4 percent to $37.00 a barrel in New York, after a 3.7 percent slide on Tuesday that marked its biggest loss in almost four weeks. The Energy Information Administration cut its U.S. output forecast through 2017 as drillers idle rigs to conserve cash. That helped counter an increase in inventories, which rose by 4.4 million barrels last week, the industry-funded American Petroleum Institute was said to report. Government data Wednesday is forecast to show supplies increased.
Nickel rebounded 2.6 percent after tumbling 8.5 percent on Tuesday, while copper gained 1 percent. Copper demand won’t catch up with supply until 2017, according to a senior official at Freeport-McMoRan Inc., the largest publicly traded producer of the metal. Gold fell 0.4 percent, extending Tuesday’s retreat from a one-year high. The Bloomberg Commodity Index’s rebound comes after a 1.1 percent loss in the last session. It’s dropped 21 percent in the past year.
“The IMF’s latest reading of the global economy shows once again a weakening baseline,” IMF First Deputy Managing Director David Lipton said Tuesday in Washington. “Moreover, risks have increased further, with volatile financial markets and low commodity prices creating fresh concerns about the health of the global economy.”
On today's US calendar, the only releases of note are the January wholesale inventories and trade sales data with modest declines expected for both
DB's Jim Reid concludes the overnight wrap
The weaker sentiment has continued during the Asia session this morning where risk assets continue to remain under pressure. It’s China which is leading the way with the Shanghai Comp -2.04%, tumbling into the midday break (although we note that this time yesterday saw the index rally back post the break) while the Hang Seng (-0.34%) and Nikkei (-0.74%) are also struggling. Only the ASX (+0.66%) is up while credit markets are 2 to 4bps wider generally. With little in the way of data, some of the focus has also been on the latest in the US Presidential race where Trump has been victorious in both the Mississippi and Michigan Republican primaries, and thus cementing further his control in the race, while Clinton has defeated Sanders in the Mississippi race with the outcome from the Michigan primary much closer. US equity futures are little changed this morning.
Back to Oil briefly, yesterday our commodities and US fixed income colleagues published an interesting note looking at the impact of the Oil price decline not just in HY credit (where they go into further detail on current and projected default rates and recovery values) but across much of the wider credit spectrum. The note touches on the extent to which CLO’s and CMBS have been affected as an asset class, while also looking at how energy price declines have had a positive impact for consumer ABS and aviation debt.
In truth, aside from the China numbers and focus on moves in commodity markets there wasn’t a whole lot of new news in yesterday’s session. That said some of the more interesting moves were in rates markets where global bond yields moved materially lower. It was Japan where the rally was most evident, helped to a large degree by a record low yield set at the 30y JGB auction yesterday with demand for the bonds the highest since May 2014. That resulted in 30y JGB’s rallying 22bps to a record low 0.468%, an unprecedented rally considering we started the year at 1.265%. Meanwhile 10y JGB’s dived deeper into negative territory at -0.108% (-5.3bps) with the curve now negative up until the 12.5y maturity mark. Yields in Europe followed suit with 10y Bunds in particular down 4.2bps to 0.181% (although still off the low print of last Monday) while similar maturity Treasuries closed down 7.7bps at 1.830%.
With regards to the economic dataflow yesterday, in the US the only release of note was the NFIB small business optimism print for February which was down a disappointing 1pt relative to the prior month to 92.9 (vs. 94.0 expected) and a two-year low. The most significant surprise was reserved for Germany however where industrial production in January was up a much greater than expected +3.3% mom (vs. +0.5% expected) with the December reading revised up nine-tenths also. Our European Economics colleagues cautioned that the data was likely overstated by mild winter weather and one-offs, but that being said it should help put concerns that Germany is at the brink of recession at bay. Away from this there was no change in the second revision of Q4 GDP for the Euro area at +0.3% qoq.
Before the day ahead and anniversary performance review, the latest HY monthly is now out. In the note we highlight the recent outperformance of USD HY vs. EUR HY. This has largely been driven by the improvement in oil/commodity prices, with the Oil & Gas and Basic Materials sectors seeing strong returns. We also take a look at issuance trends and pose the question of whether the lack of supply in European HY is acting as a positive technical support or actually more of a headwind for the market. It seems clear to us that the lack of issuance has probably meant growing investor cash balances, however we argue that performance might actually be supported by a more active primary market at the moment. The lack of new deals and sometimes lack of success in bringing new deals to market may actually be weighing on sentiment. We’ve also provided an update of our table looking at the YTD performance of the largest issuers in the EUR HY market. Email Nick for a copy.
Looking at the day ahead, the calendar is fairly thin on the ground data-wise again today. This morning in the European session the main data of note will be the industrial and manufacturing production reports out of the UK covering the January month (expected at +0.4% mom and +0.2% mom respectively), while the French business sentiment survey is also expected. Over in the US this afternoon the only releases of note are the January wholesale inventories and trade sales data with modest declines expected for both. Away from this the BoE’s Bailey is expected to speak this morning, while central bank wise we’ll get the Bank of Canada decision this afternoon (no change expected).