Overnight Summary: EURophoria Continues Into Payrolls

The EURophoria which commenced yesterday after the repeatedly pre-leaked Mario Draghi speech, has continued into the overnight session, this time getting a helping hand from China, whose Shanghai Composite index is up by just under 4% or the most in eight months following an announcement that The National Development & Reform Commission, China’s top planning agency, said it approved plans to build 2,018 kilometers (1,254 miles) of roads, a day after it backed plans for subway projects in 18 cities. In other words China's empty cities will still be empty but will now be connected and have even better infrastructure. Irrelevant of how the extra money has been injected, or for what ends, the stock and bond markets around the world are enjoying the news, with the EURUSD rising to 1.2700 recently, the Spanish 10 Year sliding to under 6% and the lowest since March despite Industrial Output sliding 5.4% or more than the 5.2% expected, even as German 2 year yield rise to the highest since July despite strong German trade surplus and Industrial Production data, with European equities green across the board and the EURCHF in mid-1.21 territory on louder unfounded rumors the SNB will hike the peg to 1.22/1.23. And with the European action in teh rearview mirror (more below), all eyes turn to today's key report, the August Non-Farm Payrolls.

Bloomberg's summary bulletin present another comprehensive summary:

  • Treasuries decline for fourth day, with 30-yr yields leading curve steeper; nonfarm payrolls report due at 8:30am New York time, economists forecast +130k, +142k private payrolls, unemployment rate holding at 8.3%.
  • Italian and Spanish bonds extended gains, with Spanish 10-yr yield below 6%, 2-yr falling to lowest since April. Peripheral spreads tighten as German bunds fall for sixth day
  • Barclay’s expects Spain to request “precautionary program” before EU’s Oct. 18-19 summit, which will allow ECB’s OMT to begin
  • An imminent intervention in either Spain or Italy less likely now than last month, analysts led by Nomura’s Chief European Economist Jacques Cailloux wrote in a research note
  • Industrial production unexpectedly rose in Germany; U.K.’s surged by the most in 25 years
  • Ifo Institute president Hans-Werner Sinn argues that Germany is paying more than it thinks for Greece’s fiscal recklessness and that the struggling southern European nation should long ago have left the euro zone
  • China approved plans to build 2,018 kilometers (1,254 miles) of roads, spurring the biggest stock- market rally in almost eight months
  • Barack Obama asked for a second term with a pledge to keep rebuilding a battered economy in a way that “may be harder but it leads to a better place”
  • EUR/USD extends yesterday’s gains, reaches highest since June 28. European stocks and U.S. equity-index futures higher. Energy complex gains

For those who need a full explanation of what has happened in the past 24 hours, here is DB's Jim Reid doing just that.

With the door for bond purchases now left open the ball is now back in Spain and probably Italy's court as well. Spanish PM Rajoy and Italian PM Monti have been amongst the most vocal proponents of further EU action to bring down funding costs. After hosting a meeting with Merkel at Madrid yesterday, Rajoy said that the conditions attached to a potential EU rescue weren't discussed and refused to discuss his views on the ECB's statement yesterday. But according to our European economists, negotiations are probably already underway, with Spain probably looking to limit the scope of the MoU to measures that Madrid has already decided to take in any case. Since the German government, the IMF and the EC have been publicly appreciative of Spain's efforts, finding a compromise should not be too complicated. Meanwhile, Italian PM Monti said the OMT reduces the stigma of asking for aid but reiterated that avoiding seek aid remains a priority.


The ECB's decisions yesterday saw a further decline in the funding costs of Spain and Italy. Spanish 2yr and 10yr yields were down 19bp and 39bps respectively with the 10yr (6.03%) closing at the lowest since 11 May 2012. Italy's 10yr yield declined 25bps yesterday to 5.261%, lowest since 3 April 2012. Spanish and Italian 10yr rates have fallen by 83bo and 59bp this week. The EUR/USD added +0.24% with upside perhaps being capped by the positive US data flow yesterday.


Indeed August non-manufacturing ISM rose approximately one point to 53.7 (vs 52.5 expected) mostly driven by growth in employment (53.8 vs. 49.3). Joe Lavorgna points out that in the past this indicator has been highly correlated with private sector payroll growth. On that note the August ADP employment report yesterday also topped expectations (201k vs 140k expected) whereas the latest jobless claims (365k vs 374k prior) also pointed towards continued labour market improvements.


With all that the S&P500 surged 2.04% higher to close at a YTD high of 1,432 (also the highest since May 2008). It was a strong day for all ten major S&P 500 sectors led by gains in Materials (+2.59%), Financials (+2.43%) and IT (+2.40%). The S&P 500 aside we note that the Dow, NASDAQ, and the DAX are also up +8.8%, +20.3%, and +21.5% respectively this year, at YTD highs.  Brent crude oil underperformed (-0.4%) following reports that the US government may release oil from its Strategic Petroleum Reserve.


Overnight markets are trading up, led by the Nikkei (+1.7%) and KOSPI (+2.0%). The Shanghai Composite (+3.0%) is on track for its largest one-day gain in 6 months on the back of news that China's NDRC has approved a plan to build over 2000kms of highways to help boost economic growth. The news follows announcements earlier in the week that the NDRC will approve subway projects in 18 cities across China. Fitch upgraded Korea to AA- yesterday, citing continued economic and financial stability and fiscal discipline. This follows on from Moody's upgrade last week and is adding further tightening pressure on Korea's CDS. Korea now trades 2bp inside China.


With the ECB and Draghi out of the way we are left with non-farm payrolls as the final key event for the week. A good report will perhaps add further fuel to the current risk-on mood while a sharply weaker report will probably re-ignite the QE debate. For the record the market is looking for a headline and private payrolls of +130k and +142k respectively. Unemployment is expected to hold at 8.3%. Ahead of that, we get German trade data and IP as well as UK IP and PPI. All eyes on payrolls though.