"There Is A Lot Of Fear In The Market" - Stocks, Futures Slide After Yen Soars

Two days after stocks slid in a coordinated risk-off session, and one day after a DOE estimate of US oil inventories sent US stocks surging while the failed Allergan-Pfizer deal unleashed torrential hopes of a biotech M&A spree leading to the single best day for the sector in 5 years, sentiment has again shifted, this time due to a violent surge in the Yen as the market keeps testing the resolve of the Japanese central bank to keep its currency weak, and so far finding it to be nonexistent.

As a result, as we reported previously, the USDJPY plunged nearly 200 pips overnight, undoing all its gains since the expansion of Japan's QQE on October 31 2014, and while equities did their best to ignore this move for as long as possible, ultimately they too succumbed.

The yen gained even after a government official said authorities would take necessary action on foreign exchange if needed. Futures, after urgently trying to ignore the Yen move, finally noticed it overnight, pushing the E-mini to session lows, and undoing almost all of the DOE gains.


As noted earlier, and as Bloomberg also reports, "the yen is being driven higher by risk aversion and by market participants testing the Bank of Japan’s tolerance toward a stronger currency,” said Thu Lan Nguyen, a foreign exchange strategist at Commerzbank AG in Frankfurt.

Also according to Bloomberg, JPMorgan’s Tohru Sasaki predicted the world-beating surge that carried the yen to a 17-month high. Now the former Bank of Japan official says the government will be reluctant to intervene to stem the currency’s advance - especially as such a move would probably be futile.

Exporters bringing cash home are the main driver of the yen’s 11 percent rally against the dollar this year, not speculators, so selling the currency to weaken it would be ineffective, said Sasaki, head of Japan markets research at JPMorgan in Tokyo. He forecasts a gain to 103 yen per dollar by year-end. He also sees attempts by officials to talk the currency lower as counterproductive.

“If you only shoot blanks, it just makes a sound -- at first everyone is surprised, but once they get used to it, it’s just noise,” said Sasaki, who’s been the most accurate forecaster of the yen this year. More jawboning will encourage speculators to buy the yen on dips against the dollar, he said.

It's not just the Yen. "There is a lot of fear in the market," Herbert Perus, head of equities at Raiffeisen Capital Management in Vienna, told Bloomberg. "A lot of large investors do not believe in rising stock prices and were positioning themselves for a downturn."

In other key overnight news, the Fed meeting minutes reaffirmed U.S. policy makers aren’t rushing to raise interest rates. Elsewhere, EMC said planning to sell Documentum business amid Dell deal. In China, the PBOC announced that after 4 months of declines, its foreign reserves posted a $32 billion rebound in the month of March.

This is where markets are currently:

  • S&P 500 futures down 0.5% to 2050
  • Stoxx 600 down 0.3% to 329.77
  • MSCI Asia Pacific up 0.9% to 126
  • US 10-yr yield down 2bps to 1.74%
  • Dollar Index up 0.03% to 94.46
  • WTI Crude futures up 0.2% to $37.82
  • Brent Futures up 0.4% to $39.98
  • Gold spot up 1.3% to $1,239
  • Silver spot up 1.3% to $15.26

Global Top News:

  • Dell and EMC Said to Be Talking to Buyers for EMC’s Documentum: Dell also said to seek buyer for Sonicwall, Quest for $4b; Dell and EMC are targeting deal completion by October
  • U.S. Braces for Worst Earnings Season Since the Financial Crisis; 1Q earnings are seen falling 9.8% y/y
  • McDonald’s Chairman McKenna Plans to Retire From Board: McKenna, 86, won’t stand for re-election at the May 26 shareholders’ meeting, will become chairman emeritus
  • Sprint Plans to Sell, Lease Back Network Assets for $2.2b: tower equipment is used as collateral to raise new loans; new finance entity will be consolidated into Sprint’s books
  • Valeant Said to Win Majority Lender Support to Waive Default: creditors gave their consent after Valeant revised terms Tuesday
  • March U.S. Retail Sales Seen Helped by Easter, Spring Break Deals: U.S. comp. sales are expected to rise 0.1% for the 5- week retail month of March, according to Retail Metrics; Costco, Zumiez kick off March comp. sales with releases post-mkt
  • Treasury Nears Rule to Force Banks to ID Shell Company Owners: Customer Due Diligence rule would close anonymity loophole; maneuver is in the spotlight after leak of law firm files
  • Monsanto Says It No Longer Sees Large-Scale M&A as Strategy: future deals will be collaborations, small acquisitions
  • Key Pieces of Dimon’s Annual Letter: Risks, Rates and Trading: warns Treasury rally may turn to rout as rates rise; Brexit outcomes are ‘large and potentially unknown,’ he says
  • China Foreign Exchange Reserves Rise for First Time in 5 Months: China’s forex reserves unexpectedly rose in March after capital outflow pressure eased as the nation’s currency steadied
  • SoftBank Said to Not Have Had Formal Talks on Yahoo Buy: Re/Code
  • China’s Apex Technology Said in Talks to Buy Lexmark: Reuters
  • Indonesia Demands Google, Facebook to Pay Taxes: Jakarta Post

Looking at regional markets, Asian stocks traded mixed as the region shrugged-off a firm Wall St. lead, where continued advances in crude prices and a cautious Fed initially boosted sentiment. ASX 200 (+0.4%) and Nikkei 225 (+0.2%) were both supported at the open by the energy sector after an unexpected DoE Inventory drawdown which saw oil prices break above USD 38/bbl. However, Japanese stocks then saw choppy trade as JPY strength persisted, while Shanghai Comp (-1.4%) failed to hold on to early gains amid weakness in telecoms and sentiment dampened following a reserved open-market-operation by the PBoC. 10yr JGBs saw relatively range-bound trade with prices marginally lower amid improved risk-appetite in Japan, while prices saw a mild recovery following the enhanced liquidity auction for 20y, 30yr and 40yr bonds.

Top Asia News:

  • China, Hong Kong Top Market for Firm at Center of Panama Papers: Region represents almost third of Mossack Fonseca’s cos.
  • Nomura Warned Against Lying After Jefferies Trader Charged: Charges against ex-Jefferies trader spurred training session
  • Yen Intervention Futile at 110 for JPMorgan After Picking Rally: Sasaki says currency will rise to 103 per dollar by year-end
  • OCBC to Buy Barclays’s Asia Wealth Division for $320 Million: Bank beats competing bid by DBS Group
  • Samsung Beats Estimates as Early Debut of S7 Boosts Sales: Analysts upgraded S7 estimates after channel checks

European equities struggle to form any significant direction as overall fundamental newsflow remains relatively light thus far, despite the fallout from last night's FOMC meeting minutes. As such, Eurostoxx (+0.25%) resides in modest positive territory led by pharmaceuticals amid M&A speculation circulating for the likes of AstraZeneca following the collapse of a tie-up between Pfizer and Allergan, while gains had been capped by the pullback observed in oil prices.

In terms of the fixed income, Bunds saw a slight break above 164.00 having found support from the softness in energy prices, however German paper has retreated from earlier highs despite the market digesting supply from France, Spain and the UK.

Top European News

  • Praet Says ECB Can Recalibrate Stimulus Again If Shocks Arise: the ECB can boost the scale of its support to the euro-area economy yet further in the event that fresh risks to the outlook arise, Executive Board member Peter Praet says
  • ‘Brexit’ Risks Leaving European Banks With $123 Billion to Cover: lenders may have to dump some securities if Britain leaves EU; bonds may no longer meet liquidity requirements under Basel
  • Citigroup Sees ‘Brexit’ Risks Moving East as Zloty Most Exposed
  • Italian Officials Said to Hold Meeting on Banks’ State Backing: Finance Minister Padoan said to have met with some bank executives on Tuesday; officials said to discuss option of EU3b fund
  • Fintech Seen Risking 250,000 Jobs as Europe Insurers Cut Costs: old IT systems burden companies as savvy start ups compete; cuts among only options to boost S/T profitability
  •     U.K. House Prices Surge as Halifax Flags ‘Brexit’ Uncertainty: values +11% in March vs year earlier; EU vote and weakening confidence may damp price rises: Halifax
  • ING Groep CEO Targets Corporate Banking Expansion in Scandinavia: Dutch bank will target Scandinavia’s corporate lending market as fastest route to expansion in region

FX markets have been dominated by the relentless JPY buying, which is no doubt of great concern to Japanese officials, but outside of verbiage against these moves, have done little to respond to the rapid rise. USD/JPY is now approaching the 108.00 level, and after topping out at 113.80 a week and a half ago, we are close to 6 JPY lower in what will be seen to be a very short space of time. Cross rate losses are equally rapid, though EUR/JPY is now finding some support ahead of 123.00. GBP/JPY losses take us to levels last seen in mid-2013, while AUD/JPY has now taken out 82.00. GBP is again under pressure against the USD and EUR — the latter back above .8100 again, but Cable is finding support ahead of 1.4000 again as the USD index is pressured in the wake of the Fed minutes last night — not that this revealed anything new to prompt the latest hit on the USD.ECB meeting report later today, but EUR/USD still managed to take out the previous highs to tip 1.1350. All on the JPY though today.

In commodities, despite starting the session off on the front-foot in the wake of yesterday's DoE report and FOMC minutes, energy prices have slipped into negative territory in recent trade alongside a modest recovery in the USD. Overall, newsflow in energy markets continues to remain light in the run up to the upcoming Doha meeting next weekend. Gold (+1.2%) saw steady gains overnight following cautious FOMC minutes and weakness in the greenback. Silver has also recovered currently priced at around USD 15.20/oz, while copper and iron ore prices saw subdued trade amid a risk-averse tone in China and a pullback in steel prices.

It’s a fairly quiet calendar over in the US this afternoon too with last week’s initial jobless claims (expected at 270k) and the February consumer credit reading the only data of note. There are a few more interesting events outside of the data to keep an eye on: the IMF release chapters of its World Economic Outlook, while the ECB’s Draghi is due to speak in Portugal. Later we will see Fed Chair Yellen partake in a discussion with former Fed Chief’s Bernanke, Greenspan and Volcker, so it’ll be interesting to see if that throws up anything of interest.

Bulletin Headline Summary:

  • FX markets have been dominated by relentless JPY buying, which is no doubt of great concern to Japanese officials, but outside of verbiage against these moves, have done little to respond to the rapid rise
  • European equities struggle to form any significant direction as overall fundamental newsflow
    remains relatively light thus far, despite the fallout from last night's FOMC meeting minutes
  • Looking ahead, highlights include ECB Minutes, Initial Jobless Claims, EIA Nat Gas Storage Change, comments from Fed Chair Yellen and George
  • Treasuries rise in overnight trading as global equity markets mixed in Europe, higher in Asia while WTI crude oil moves lower amid global growth concerns.
  • Yen climbed above 109 vs dollar for first time in 17 months as market participants shrugged off remarks by Japanese government officials aimed at curbing the currency’s gains, according to analysts
  • European Central Bank officials underlined their readiness to ease monetary policy even further should fresh risks to the economic outlook arise
  • If Britain decides to leave the European Union, a corner of the credit market may depart with it and European banks could be left having to replace as much as 108 billion euros ($123 billion) of securities
  • Dutch voters rebelled against a treaty between the European Union and Ukraine in a referendum on Wednesday, albeit on low turnout that fell short of the stampede that anti-EU campaigners hoped for
  • Italian Treasury and central bank representatives are meeting again in Rome on Thursday to discuss the creation of a state-backed fund as the country’s cooperative lenders struggle to draw private investors
  • China’s foreign-exchange reserves unexpectedly rose by $10.3 billion to $3.21 trillion last month after capital outflow pressure eased as the nation’s currency steadied
  • Sovereign 10Y bond yields mixed; European equity markets mixed, Asian markets rise; U.S. equity-index futures drop. WTI crude oil and copper drop, gold rallies

US Event Calendar

  • 8:30am: Initial Jobless Claims, April 2, est. 270k (prior 276k)
  • Continuing Claims, March 26, est. 2.170m (prior 2.173m)
  • 9:45am: Bloomberg Consumer Comfort, April 3 (prior 42.8)
  • 3:00pm: Consumer Credit, Feb., est. -$14.9b (prior $10.538b)

Central Banks

  • 5:30pm: Fed’s Yellen in New York with Volcker, Greenspan and Bernanke
  • 9:15pm: Fed’s George speaks in York, Nebraska

DB's Jim Reid concludes the overnight wrap

With newsflow fairly light yesterday, much of the broadly better sentiment which enveloped markets was blamed on the sharp bounce in Oil prices with WTI rallying back +5.18% and towards the $38/bbl mark again (which it has subsequently broken through this morning). The latest US crude inventory numbers, which showed an unexpectedly sharp decline in stockpiles, helped the story there, although digging deeper into some of the sector level performance yesterday it was actually healthcare names which led the way despite the news of that failed merger between Pfizer and Allergan. As reported by Bloomberg it appears that the two companies may look elsewhere in the sector for other potential M&A which lent some support to pharma names generally.

This morning in Asia we had initially seen most bourses follow the lead from the US last night (S&P +1.05%) in the early stages of trading, but momentum appears to be fading as we go to print. It’s bourses in China in particular which have dipped lower with the Shanghai Comp and CSI 300 -0.76% and -0.80% respectively. That has come before the latest China foreign reserves data for March (expected to show a modest fall) which is due to be released shortly.

Elsewhere the Hang Seng is flat along with the Nikkei after both opened strongly. Much of the focus has been on further strengthening for the Yen which is currently +0.6% firmer and close to breaking below ¥109 which it hasn’t done since October 2014. Elsewhere the Kospi is -0.23%, while the ASX (+0.23%) is just about holding onto gains.

The main focus yesterday was arguably on the release of those FOMC minutes. In truth there wasn’t much new material information to come out of them, instead they reinforced that fact that the Fed is clearly looking at both domestic and global economic and financial conditions. The minutes noted that ‘several participants expressed the view that the underlying factors abroad that led to a sharp, though temporary, deterioration in global financial conditions earlier this year had not been fully resolved and thus posed downside risks’. In light of that, the minutes also noted that ‘several expressed the view that a cautious approach to raising rates would be prudent or noted their concern that raising the target range as soon as April would signal a sense of urgency they did not think appropriate’.

That being said that view clearly wasn’t shared by all with the text also suggesting that some officials indicated that a move as soon as the next committee meeting this month could be warranted should the data allow for it. Clearly futures markets are unconvinced however with the market pricing in no hope of a move later this month and a still low 20% chance of a move in June.

Staying with the Fed, yesterday we heard from the Fed’s Bullard who once again maintained his view that all meetings remain live, but highlighted that the US data since the March meeting has been somewhat mixed and that ‘growth has been somewhat tepid’ and that should sluggish growth persist unexpectedly, then ‘I’d be willing to push rate hikes further into the future’.

While we’re on the subject of Fed officials, yesterday our US economists published an update of their FOMC scorecard, looking at the relative hawkishness/dovishness of each member and the overall committee as a result. Using a 1-5 scale, with the former being the most dovish and latter being the most hawkish, they attribute scores of 1 to Brainard and Tarullo and scores of 2 to Yellen, Dudley and Rosengren. Esther George (who was the only dissenter at the March meeting) is the lone voter to score a 5 with the remaining four officials scoring a 3 or 4. That means the average ranking comes in at 2.7 or in other words fairly middle of the park in terms of the dove/hawk scale.

Moving on. It was a broadly better day for risk in Europe yesterday too and particularly in the equity space where we saw the Stoxx 600 bounce back +0.76%. A less softer than expected German IP print in February (-0.5% mom vs. -1.8% expected) was the only data of note, while in the rates space we saw 10y Bunds have a rare weaker session with the yield closing up 2bps at 0.117%. In fact, that’s just the third time in since March 15th that 10y Bund yields have closed higher. Much like the moves for Oil, it was a fairly decent day for the bulk of the commodity space although Gold was an exception to that after weakening -0.72%. That hot start to the year for the precious metal, particularly through January and February, has paused for breath somewhat with Gold now 12% below where it closed February.

Wrapping things up, performance for credit markets and particularly in Europe was a little more subdued yesterday. The iTraxx Main and Crossover indices finished 0.5bps and 2bps tighter respectively however financials were a notable underperformer (sub fins +6bps, senior fins +1bp) during the day with some attributing this to some concern of a potential weak upcoming quarterly reporting period. There’s been no stopping the primary market this week though where in Europe we saw close to €13bn price in what was the busiest day for issuance in 3 weeks. It was a similar story across the pond where we saw the third straight double digit day of issuance. Meanwhile and on a more bottom-up specific topic, after the market close yesterday the WSJ reported that Valeant is said to have secured a commitment from debt holders to amend the terms of its debt in a long running saga which had investors call into question a potential technical default not long ago. The deal looks like giving the company some breathing room for now.

Taking a look at today’s calendar, this morning in Europe the only notable data of note is out of France, where we’ll get the February trade balance reading, and the UK where the latest house price data is due. Shortly after midday we’ll then get the ECB minutes from that famous March meeting. It’s a fairly quiet calendar over in the US this afternoon too with last week’s initial jobless claims (expected at 270k) and the February consumer credit reading the only data of note. There are a few more interesting events outside of the data to keep an eye on. This afternoon we’ll see the IMF release chapters of its World Economic Outlook, while the ECB’s Draghi is due to speak in Portugal this afternoon. This evening will see Fed Chair Yellen partake in a discussion with former Fed Chief’s Bernanke, Greenspan and Volcker, so it’ll be interesting to see if that throws up anything of interest.