Central Bank Rally Fizzles: Equity Futures Lower As Attention Turns To "Hawkish Fed" Risk

The biggest macro development over the weekend was China's latest "gloomy" economic update, in which industrial production, retail sales and lending figures all missed estimates, however now that we are back to central bank bailout mode, bad news is once again good news, and the Shanghai Comp soared +1.7% among the best performers in Asia on calls for further central bank stimulus while the new CSRC chief also vowed to intervene in stock markets if necessary. In other words, the worse the data in China, the better.

The same of course as true in Europe, where just as Draghi admitted that the 2016 inflation forecast plunged (as we warned in December) and the ECB would not hit its 2.0% inflation target by 2019....


... the ECB also unleashed a massive bond buying rally after Draghi said for the first time ever the ECB would monetize corporate bonds, in a move that has infuriated Germany, and confirms Europe's economy is weaker than ever before as otherwise it wouldn't need this unprecedented support by its central bank.

As a result, the MSCI Asia Pacific Index and the Stoxx Europe 600 Index were headed for their highest closes in two months.


As Bloomberg summarizes the global "deja vu all over again" situation, Central banks are being relied on to revive the global economy after a worsening growth outlook wiped almost $9 trillion off the value of equities worldwide this year through mid-February. The bulk of the stock-market losses have been clawed back, helped by monetary easing in China and last week’s announcement of unprecedented stimulus by the European Central Bank. The Bank of Japan, which adopted a negative interest rate in January, will conclude a policy review on Tuesday and a Federal Reserve meeting ends Wednesday.

“Central banks are going to be dominating market sentiment,” Matthew Sherwood, head of investment strategy at Perpetual Ltd. in Sydney, which manages about $21 billion, told Bloomberg Radio. “That could be enough for the risk rally to continue, but I think it is starting to run out of steam. The Fed is going to be front and center.”

And while Asia was up on China's bad data, and Europe was higher again this morning to catch up for the Friday afternoon US surge, US equity futures may have finally topped off and are now looking at this week's critical data, namely the BOJ's decision tomorrow (where Kuroda is expected to do nothing), and the Fed's decision on Wednesday where a far more "hawkish announcement" than currently priced in by the market, as Goldman warned last night, is likely, in what would put an end to the momentum and "weak balance sheet" rally. Earlier today, Deutsche Bank doubled down on that call as well.

Elsehwere, WTI started the week lower after Iran said over the weekend it plans to boost output to 4MM b/d before joining other suppliers in seeking ways to balance marke, while Saudi crude output was little changed at 10.22mln bpd in Feb vs. 10.23mln in Jan. Not even the ongoing "imminent OPEC meeting" headline farce, where according to flashing read headlines the OPEC producer meeting is now "expected" to take place in April instead of March as repeatedly reported previously, has been enough to push oil higher today.

Market Wrap

  • S&P 500 futures down 0.1% to 2008
  • Stoxx 600 up 0.8% to 345
  • FTSE 100 up 0.5% to 6173
  • DAX up 1.6% to 9990
  • German 10Yr yield down 3bps to 0.25%
  • Italian 10Yr yield down 3bps to 1.3%
  • Spanish 10Yr yield down 2bps to 1.46%
  • MSCI Asia Pacific up 1% to 128
  • Nikkei 225 up 1.7% to 17234
  • Hang Seng up 1.2% to 20435
  • Shanghai Composite up 1.8% to 2859
  • S&P/ASX 200 up 0.4% to 5185
  • US 10-yr yield down 2bps to 1.96%
  • Dollar Index up 0.17% to 96.33
  • WTI Crude futures down 2.1% to $37.68
  • Brent Futures down 1.7% to $39.72
  • Gold spot up 0.4% to $1,256
  • Silver spot up 1.1% to $15.66

Top Global News via BBG

  • Anbang Expands U.S. Hotel Foray With Record $6.5 Billion Deal: Anbang Insurance’s $6.5b agreement to buy 16 U.S. luxury resorts and hotels from Blackstone marks a record transaction for Chinese buyers of American real estate
  • Brent Swings Near $40 as Falling U.S. Rigs Counter Iran Output: U.S. rig count drops 12th week to lowest since Dec. 2009
  • Danaher, Duke Energy, NextEra Energy to Join S&P 100: S&P 500 constituents DHR, DUK, NEE to replace Devon Energy, Anadarko Petroleum, Norfolk Southern in S&P 100 index after close of trading March 18
  • LSE, Deutsche Boerse Deal Could Be Announced Monday, Times Says
  • Morgan Stanley Says Bonds Set to Surge in 2016 Year of the Bull: U.S. 10-yr yield may fall to 1.45% by Sept. 30 report says
  • Airbnb to Let Neighbors Give Feedback on Hosts, ‘Party Houses’: A new tool will let neighbors weigh in with feedback on Airbnb properties nearby, Yasuyuki Tanabe, the head of Airbnb in Japan, said at a government panel in Tokyo on Monday
  • Disney Says ‘Zootopia’ Tops Weekend Box Office on Sales of $50m
  • Trump Switches Florida Rally to Ohio as Protests Shadow Events
  • Hillary Clinton Accuses Donald Trump of Stoking Violence to Win Votes
  • Carl Icahn Said in Talks With Son Brett to Succeed Him: NYP
  • Apollo Global Said to Near Deal to Buy Fresh Market: Reuters: Nearing a deal to acquire Fresh Market for more than $1.3b, Reuters reports, citing unidentified people familiar
  • Energy Transfer Equity Held Talks on Sunoco Sale: Reuters

* * *

Looking at regional markets, we start in Asia where equities tracked Friday's Wall St. gains where stock markets rose to the highest level since early January as they digested the ECB's aggressive measures. Nikkei 225 (+1.7%) advanced with index-giant Fast Retailing gaining nearly 5% as JPY weakness bolstered exporter names, while the largest increase in machine orders for 13 years further added to the optimism. ASX 200 (+0.4%) was led by telecoms and energy after crude posted a 4th consecutive weekly gain. Chinese markets outperformed despite weak China data in which industrial production, retail sales and lending figures all missed estimates, with the Shanghai Comp (+1.8%) among the best performers as the data supports calls for further measures, while the new CSRC chief also vowed to intervene in stock markets if necessary. 10yr JGBs traded higher with prices back above the 151.00 level amid relatively thin trade as the BoJ kicked off its 2-day policy meeting, in which they are expected to keep policy on hold.

Top Asian News

  • China Overseas Buys Citic’s Property Assets for $4.8 Billion: To buy the Chinese residential property assets held by Citic for about 31b yuan ($4.8b); China Overseas will sell 1.1b shares at HK$27.13 each to the Citic cos. as part of deal
  • China Burns Hedge Funds as $562 Million Yuan Bet Turns Worthless: Options on weaker yuan fail to pay out as PBOC intervenes
  • Offshore Yuan Drops as Zhou Says No Need for Major Economy Steps: Investors were expecting more support for growth, analyst says
  • Thailand Passes Korea as Top Nation for Mainland Visitors: Thailand and Japan are attracting more Chinese tourists as South Korea draws fewer
  • India Said to Need an Extra $3.7 Billion in Risk to Deficit Goal: Modi administration to ask parliament for more cash
  • Alibaba Said to Set Fees for Banks on Loan of Up to $4 Billion: Co. is offering 60 bps to lenders committing $200m and above to facility

In Europe, Monday has kicked off where Friday ended, with markets still feeling the full force of Draghi's actions last week as European equities and fixed income markets all reside in the green. Euro Stoxx (+1.2%) continue to gain today, with the ever-turbulent Italian banking sector among the best performers today, while divergence has been seen in commodities, with materials outperforming while energy remains one of the session's laggards. Bunds remain at elevated levels this morning, trading above the 162.00 level and amid no supply today, while this week is set to see supply fall to around EUR 16bIn from the EUR 18.2bIn that hit the market last week.

Top European News

  • German Divisions on Merkel Refugee Policy Laid Bare in Votes: Anti-immigration AfD party surges to record in three elections
  • Safran Shares Fall Most Since Feb. 8 After Margin Forecast: Sees flat adjusted recurring oper. margin 2016-20
  • Aryzta Shares Retreat on Forecast for ‘Erratic’ Revenue Growth: Said revenue missed its own forecasts and growth will be erratic over the next 18 months.
  • Turkey Vows Swift Retaliation After Bomb Kills 34; Lira Weakens: Turkish warplanes struck Kurdish militants in northern Iraq hours after a suicide car bomb killed at least 37 people in the capital, Ankara
  • Swiss Seen Holding Fire as Franc Resists ECB for a Second Time: Durvey shows most economists see SNB leaving rates unchanged

In currencies, it has been a very quiet start to the week, with range bound trade seen in the majors so far. We saw some early selling of AUD/USD and Cable, while EUR/USD drifted lower again, but this flow has been turned on its head as the USD index gives up on what has been a modest recovery. USD/JPY had tested 114.00 in the Asia session, but any hopes of retesting this will perhaps have been dashed in the wake of comments from Japan PM advisor Hamada who sees further BoJ easing unlikely near term with the JPY 'not too strong' at current levels. USD/CAD has been edging higher as Oil has taken a dip, but the upside has been contained well ahead of 1.3300 higher up.

Australia’s dollar fell 0.5 percent, pacing declines among the currencies of resource-exporting nations, after Chinese industrial output and retail sales data over the weekend added to signs of a slowdown in the world’s second-biggest economy. Malaysia’s ringgit lost 0.4 percent as a falling oil price dimmed prospects for Asia’s only major net exporter of crude. The yuan fell 0.16 percent in Hong Kong’s offshore market and was little changed in Shanghai.

Turkey’s lira weakened 0.5 percent after a suicide car bomb in Ankara killed at least 34 people, the capital’s third attack in five months. The rand slid 0.7 percent, leading losses among major currencies. South Africa’s Directorate for Priority Crime Investigation wants information from Finance Minister Gordhan on what he knew about a so-called rogue unit in the tax agency that investigated political leaders, the Sunday Independent newspaper reported, citing a letter sent by the police unit’s head to the minister’s lawyers.

The Egyptian central bank devalued its pound by almost 13 percent at an “exceptional” sale of dollars on Monday. The central bank said it sold $198.1 million to local lenders at 8.85 pounds per dollar. That compares with a previous exchange rate of 7.73 pounds.

In commodities, Brent and WTI started the session fairly flat and then fell roughly 1.7%. This comes as Saudi crude output was little changed at 10.22mln bpd in Feb vs. 10.23mln in Jan, and also after Iran said it plans to boost output to 4 million barrels a day before it will consider joining other suppliers in seeking ways to rebalance the global crude market.

Gold and other precious metals on the other hand have risen slightly, with gold still rising toward 1260.00/oz with the next notable resistance level at 1260.50.

Copper rose 0.3 percent in London, rebounding from earlier losses. Gold gained 0.5 percent, after retreating 1.8 percent on Friday. The precious metal is far from being out of favor, with money managers holding the biggest net-long position in related futures and options in more than a year, according to Commodity Futures Trading Commission data.

There is no tier 1 economic data in the US today.

Overnight Bulletin Summary from RanSquawk and Bloomberg

  • European equities start the week on the front foot as financial names lead the way higher in the wake of last week's ECB policy announcements
  • A very quiet start to the week, with range bound trade seen in the majors so far with the USD giving up on its initial modest recovery
  • Treasuries higher overnight, global equity markets rally; crude drops, China’s new securities regulator said it was too early for state rescue funds to leave market and vowed to step in “decisively” if needed to curb panic; this week brings FOMC rate decision on Wednesday, no hike expected.
  • Even though the short-term rates market is priced for unchanged rates at this week’s FOMC meeting, it’s still expected to react as it adjusts to the central bank’s updated Summary of Economic Projections (SEP), known as the “dots”
  • Another sign of how crucial buybacks are in propping up the bull market as it enters its eighth year -- S&P’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007
  • Oil fell from a three-month high as Iran plans to boost output by about a third to 4 million barrels a day before joining talks to freeze production. Futures dropped as much as 2.5% in New York
  • Dilma Rousseff’s future as president of Brazil was cast into further doubt as millions of protesters, wearied by scandal and recession, demonstrated peacefully for her ouster in some of the largest rallies in the country’s modern history
  • Chancellor Merkel faces an increasingly splintered political landscape after voters punished her party and lifted the anti-immigration Alternative for Germany to its best showing yet in three state elections dominated by the refugee crisis
  • Industrial production in the euro area jumped 2.1% in January from December, its strongest monthly performance in more than six years, boosted by energy and capital goods
  • Since hitting a 3 1/2-year low just a month ago, European banks have rebounded 28%, with Greece’s Eurobank Ergasias SA, Italy’s UniCredit SpA and Deutsche Bank AG among the top performers
  • Foreign buyers boosted their holdings of Turkey’s sovereign debt by the most in 19 months in February, finding it hard to resist the highest yields in emerging Europe, encouraged by a slowdown in inflation and the ECB stimulus outlook
  • No IG corporates priced Friday; weekly volume $44.595b, March $86.42b, YTD $380.67b; $800m HY priced Friday, $3.225b last week, $14.025b MTD

US Event Calendar

  • No events

Central Banks

  • TBA: Bank of Japan policy rate, est. -0.1% (prior -0.1%)
  • 3:00pm: Reserve Bank of New Zealand speaks in Auckland
  • 8:30pm: Reserve Bank of Australia meeting minutes

Jim Reid concludes the overnight wrap

2016 for European credit investors so far reminds me of Season 9 of Dallas which was completely wiped from existence and turned into Pam Ewing's bad dream in a plot devise to allow Bobby Ewing to return from the dead having been run down by a car at the end of Season 8. I remember crying at his death as a 10 year old just as I cried a few years earlier at JR Ewing being shot as my nickname at school was JR given my initials. I therefore felt his pain pretty hard. Anyway Draghi has put on his ten gallon hat and has helped write off a nightmare start to 2016 as a bad dream which investors have now awakened from.

To give some context to this turnaround, in the CDS world iTraxx Europe tightened -17bps on Friday (-7bps Thursday) and 58bps off the 2016 wides to now be 10bps tighter on the year. Crossover was 50bps tighter Friday (-18bps Thursday), 178bps off the 2016 wides and 6bps tighter YTD. Even iTraxx Fin Senior has edged just tighter on the year after Friday's 17bps rally. Sub Fins are back to 'only' 15bps wider in 2016 after 34bps of tightening on Friday. In the more important cash market, EU iBoxx non-financial IG corporates (closest to the universe the ECB will potentially pick from) were 11bps tighter on Friday which was the best day since 2011 and in the top 10 of best days of the near 4300 business days since the Euro started in 1999. This index is now 5bps tighter on the year and 34bps off the wides in mid-February. This index is still historically quite wide and we'd still expect notable tightening as we discussed in our note published Friday morning (see the link at the bottom or in your mail boxes at around 5.30am Friday).

One of the things we discussed in our 2016 outlook was that although central banks have limited ability to influence economies in what is a near liquidity trap, we still thought they could move markets this year in spite of concerns they were running out of bullets. The rationale was that with inflation so low they had plenty of room to be aggressive. The ECB last week delivered on this and this week it's over to the BoJ (tomorrow) and the Fed (Wednesday). While the BoJ will likely take pause for breath after the controversial decision to move into negative rate territory last meeting, Kuroda's press conference will be widely anticipated. As will Yellen's after the FOMC will almost certainly stay put. Financial conditions have eased since the last meeting so we would expect the Fed to retain optionality to hike in June whilst acknowledging the fragilities around. Data dependency will likely be the key theme. Overall we still think 2017 will be more of a challenge for the economy and central bankers than in 2016 where inflation is still low enough for the plates to be spun a little more.

Speaking of challenges, China data is proving difficult for analysts to get their head round following a mixed set of releases over the weekend. The negative side of things saw both retail sales (down five-tenths to 10.2% yoy; vs. 11.0% expected) and industrial production (down seven-tenths to 5.4% yoy; vs. 5.6% expected) fall in February relative to the prior month, while growth of funds available for fixed asset investment was also noted as slowing. On the flip side the big surprise was a rebound in fixed asset investment, driven by the rise of property investment. Investment grew 10.2% yoy last month (vs. 9.3% expected) which was up two-tenths from January. DB’s Zhiwei Zhang also highlighted that other indicators in the property sector rebounded as well including the value of property sales, land sales and new housing starts – all of which is suggesting that the momentum in property investment may continue at least in the next few months.

Taking a look at our screens this morning it’s been a strong start for much of Asia this morning with bourses following the lead from those gains in Europe and Wall Street on Friday. It’s China which is leading the way however with the Shanghai Comp (+2.58%) and Shenzhen (+4.04%) both rallying into the midday break. Elsewhere, there’s gains also for the Nikkei (+1.79%), Hang Seng (+1.32%) and ASX (+0.34%). There’s been a big rally for credit markets also. ITraxx Aus and Asia indices are currently 10bps and 5bps tighter respectively. US equity index futures are flat currently, along with Oil. Asian currencies are generally outperforming while the Turkish Lira is a touch weaker following those disturbing reports yesterday of a blast in the Turkish capital of Ankara.

Also of note from the weekend were the German regional elections, where the big news is that of some signs of diminishing support for German Chancellor Merkel’s CDU party. Instead, it’s the rightwing populist forces which appear to have come out on top, with the anti-immigration Alternative for Germany (AfD) party in particular gaining notable support. As per the FT, Merkel’s CDU party has failed in its attempt to claw back the majority in the Baden-Wurttemberg and Rhineland-Palatinate while projections are also suggesting that the party will fail to garner enough votes to create a viable coalition in Saxony-Anhalt. With the refugee crisis in full debate and clearly a major factor in the results, it’s the AfD party which has made the most headway and is projected to win 24% of the vote in Saxony-Anhalt as well as exceeding expectations in Baden-Wurttemberg (15%) and Rhineland-Palatinate (12%). The party is currently projected to be presented in eight of Germany’s 16 regional assemblies. Given similar results in other parts of Europe (most recently in France with the National Front), political risks in Europe are still very much a factor to keep an eye on.

A quick recap of the rest of Friday’s news and price action. One market worth keeping an eye in the wake of the ECB is the new issue corporate market in Europe and, while quiet from an overall volume perspective on Friday, a small deal (€600m) from French auto component manufacturer Valeo caught the eye with the order book said to have closed above €7bn. Evidence then perhaps of what the presence of a new large potential IG bond buyer (in the ECB) can do for demand in the primary market now then.

So while credit markets caught the eye with those huge moves tighter, equity markets bounced back in style with big moves of their own, in stark contrast to the price action which concluded on Thursday. With financials driving the moves, the Stoxx 600 finished with a +2.62% gain to close at its highest level since late-January, while peripheral markets were the big outperformers with the IBEX and FTSE MIB up +3.69% and +4.80% respectively. Those gains also helped the S&P 500 finish up +1.64% with the month of March proving to be a fruitful one so far for the US equities (index has now closed higher on 8 of the 9 trading days). A recovery for Oil also (WTI +1.74%) did little to dampen the mood with the IEA even going as far as saying on Friday that prices may have ‘bottomed out’ and that ‘there may be light at the end of what has been a long, dark tunnel’.

Base metals had a good day too (Copper +1.64%, Zinc +2.07%, Nickel +0.86%) while unsurprisingly it was emerging market and commodity-sensitive currencies which led the way in the FX space. European sovereign bond markets staged an impressive rally also. 10y Bunds ended the session down over 3bps in yield at 0.269% (although are still higher than where they were pre-ECB) while in the periphery we saw a massive rally for similar maturity bonds in Italy (-13.3bps), Spain (-9.9bps) and Portugal (-21.3bps). Moves in the US Treasury market were more reflective of traditional risk-on mode with the benchmark 10y finishing up over 5bps higher in yield at 1.985% and the highest now since the 27th January. Fed fund futures crept up as a result too with the probability of a hike by the end of the year now at 77% (from 74%) – a notable swing from the lowly 11% priced in during the February lows.

There was little data to conclude the week and certainly not enough to impact the price action. In the US the import price index reading for February was a tad less deflationary than expected (-0.3% mom vs. -0.7% expected). Prior to this we learned that there was no change to the final February CPI reading for Germany at +0.4% mom and so confirming a leg lower in the YoY rate to 0.0% (from +0.5% in January). Elsewhere in Italy the January industrial production reading was a lot more robust that expected at +1.9% mom (vs. +0.7% expected), which lends some support to today’s wider Euro area figure.