Quad Witching Day Has Quiet Start

It has been a quiet start to Quadruple Witching Friday (expiration of stock index futures, stock index options, stock options and single stock futures) but expect that to change, as erratic price action is a recurring hallmark of Quad Witches, especially with persistent low volume and markets that tend to shut down for no reason. So far stocks have traded steady in Europe this morning, credit spreads widened and Bunds traded in positive territory as market participants positioned for the much-anticipated German elections which are to be held on Sunday, with exit polls to be made available after the close of polling stations at 6pm local time. Ahead of that, and as reported here previously, Germany’s AfD Eurosceptic party could win enough support in the general election on Sunday to gain seats in the German Bundestag, an opinion poll published for a leading newspaper has forecast for the first time. Basic materials and utilities underperformed in Europe, with RWE trading sharply lower in Germany after the company announced plans to cut its dividend by half (and with the Adidas fiasco yesterday, one wonders just how bad things in Europe really are).


Moments ago, European banks surprised market watchers after they announced plan to repay €7.91b in the two 3Y LTRO loans next week, much higher than the expected €2.5 billion in combined repayments, which was the highest weekly repayment since May 29. This sent the 1y1y EONIA swap higher following a drop lower, paring gains to hit 41bps from 38.5bps before ECB announcement. It also pushed the EURUSD higher by 30 pips from 1.352 to the mid 1.35s. Should this pace of liquidity withdrawal accelerate, excpet the ECB to do the counterintuitive and force yet another LTRO down the throats of European banks who are making it quite clear they have zero interest in the current reverse carry trade arrangement.


Out in India, the RBI surprised everyone when in an ongoing attempt to both fight inflation, and keep the market liquid, it both raised the repo rate by 25 bps in a surprising move, while cutting the marginal standing facility by 75 bps to 9.50%. More on this shortly.


Turning to the day ahead, there isn’t very much on the economic calendar but there will be a full buffet of Fed talking heads justifying why the Fed did a U-turn on taper and shocking the market. The relatively hawkish Esther George from the Kansas City Fed will be speaking, as will Fed Governor Tarullo and the St Louis Fed’s Bullard (all are FOMC members). Minneapolis President Kocherlakota speaks in New York today as well. 


Overnight highlights bulleting from Bloomberg and RanSquawk:



  • Treasuries higher, with 10Y notes headed for biggest weekly gain in two months after the Fed refrained from tapering; 5Y yields fell 22.6bps, 7Y 19.8bps.

  • $27.5b of USD investment-grade bonds priced this week, including $15.3b yesterday, as issuers took advantage of lower rate structure; Trace reported trading volume of $17.4b yesterday, led by Verizon’s new 30Y

  • Heavy slate of Fed speakers today, with St Louis Fed’s Bullard on Bloomberg Television at 7pm, George and Kocherlakota in early afternoon

  • India’s central bank Governor Raghuram Rajan surprised analysts by raising the benchmark interest rate in his first policy review, seeking to rein in inflation that’s hurt the poor and dimmed economic prospects

  • Fed watcher Hilsenrath said Fed officials created new uncertainty about further push of easy-money policies and that the Fed's action is the latest in a series of communications missteps.

  • Germany’s AfD Eurosceptic party could win enough support in the general election on Sunday to gain seats in the German Bundestag, an opinion poll published for a leading newspaper has forecast for the first time. Polls suggest the election is Merkel’s to lose; Schaeuble may hold on to his post as finance chief. Election preview here

  • The U.K. Independence Party, which wants Britain to leave the EU, plans to put up a candidate for every parliamentary seat in the 2015 election in a bid to maximize support, its leader Nigel Farage said

  • Britain’s budget deficit narrowed in August as tax income rose and the government cut spending

  • The same federal contractor that vetted Edward Snowden, who leaked information about classified U.S. spying programs, also performed a background check that let the Washington Navy Yard shooter obtain a security clearance

  • The EPA is scheduled to unveil limits on greenhouse gas emissions from coal-fired power plants, a signature element of Obama’s plan to curb climate change; the industry claims rules will be so costly that no new plants will be built

  • Sovereign yields mixed. EU peripheral spreads widen. Nikkei -0.2%; Hong Kong, China and Taiwan closed for holiday. European stocks mostly higher, U.S. equity-index futures gain. WTI crude and gold fall, copper rises


Asian Headlines


BoJ's Kuroda said he hopes upward pressure on JGB yields is offset from Japan's economic improvement and rises in overseas yields. Kuroda added that long-term inflation expectations, not just underlying CPI must be around 2% for BoJ policy objective to be met.


EU & UK Headlines


Germany’s AfD Eurosceptic party could win enough support in the general election on Sunday to gain seats in the German Bundestag, an opinion poll published for a leading newspaper has forecast for the first time.


According to the report, if the Alternative für Deutschland party (AfD) can cross the 5% hurdle to enter parliament, it would almost certainly mean German Chancellor Merkel would be forced to negotiate a grand coalition with the centre-left Social Democratic party. (FT-more)


The German finance ministry said that hard industrial indicators showed a weaker start to Q3 and that German Q3 economic growth is weaker than Q2.


ECB's Liikanen said the worst may be over and that he sees 'soft signs' of Euro area economic recovery.


Liikanen further added that the ECB's accommodative policy supports the economy.


The ECB said that banks are to repay EUR 2.65bln from 1st 3y LTRO and EUR 5.26bln from 2nd LTRO.


According to latest polls, it was expected that banks would repay just EUR 1.0bln in the 1st LTRO (low estimate of EUR 0.2bln and high estimate of EUR 2.0bln) and EUR 1.50bln in the 2nd LTRO (low estimate of EUR 0.15bln and high estimate of EUR 3.00bln).


UK Public Finances (PSNCR) (Aug) M/M -3.0B vs. Exp. 5.2B (Prev. -19.6B, Rev. -21.1B)
- UK PSNB ex Interventions (Aug) M/M 13.2B vs. Exp. 13.3B (Prev. 0.1B, Rev. 0.2B)
- UK Public Sector Net Borrowing (Aug) M/M 13.2B vs. Exp. 13.3B (Prev. 0.5B, Rev. 0.7B)
- UK PSNB ex Royal Mail, APF (Aug) M/M 11.5B vs. Exp. 11.9B (Prev. 1.6B, Rev. -1.1B)


Fed watcher Hilsenrath said Fed officials created new uncertainty about further push of easy-money policies and that the Fed's action is the latest in a series of communications missteps. Hilsenrath also commented that officials sent a clear message on Wednesday about how they see short-term interest rates moving in the years ahead with the bottom line being not much at all, adding that with the new vaguer guidance, the outlook for the Fed's balance sheet is now a bit less clear.


Equities


Although stocks traded steady in Europe this morning, credit spreads widened and Bunds traded in positive territory as market participants positioned for the much-anticipated German elections which are to be held on Sunday, with exit polls to be made available after the close of polling stations at 6pm local time. Basic materials and utilities underperformed in Europe, while the cautious sentiment supported the move defensive sectors such as health-care.


Adidas and RWE led the move lower in German after the world’s second largest sportswear group by sales issued a profit warning, while RWE is reportedly planning to cuts it dividend in response to a slide in profits.


FX


EUR/USD and GBP/USD traded steady this morning as market participants refrained from placing directional bets ahead of this weekend's elections in Germany.


Of note, India's new central bank governor has raised key interest rates by 25bps to 7.50% in an attempt to reduce inflation. The cash reserve ratio was kept unchanged.


Commodities


US Secretary of State Kerry said UN Secretary Council must be prepared to act on Syria next week. Separately, Syria would call for ceasefire at Geneva according to the Deputy PM.


Iran offered to help start talks between the Syrian regime and rebels. Iranian President Hassan Rouhani announced his government’s readiness to help facilitate dialogue between the Syrian government and the opposition.


The FT's commodity editor tweeted circulating market talk that Exxon Mobil are taking an interest in BP. South African police lied about the Marikana shootings last year, in which 34 striking miners were killed, a commission of inquiry has said.


 


* * *


The complete recap of last day's events from DB's Jim Reid:


The price action yesterday did suggest that the market is sceptical that the Fed can sustain their decision not to taper for very long. US equities, credit and Treasuries all struggled to follow through their post-FOMC gains. Indeed, the S&P 500 (-0.18% on the day) started the day pushing up towards the 1730 mark before it faded back down to 1720 towards the end of the session. 10 year US treasury yields went out at the highs of 2.75% (+6.4bp) after erasing roughly half of Wednesday’s post-FOMC tightening. In credit, the initial reaction in Europe saw credit indices gap tighter however flows balanced out by the middle of the European session, and indices closed about 1-2bp off the initial tights. EM markets held onto most of Wednesday’s gains but the sentiment there also faded a during the US session typified by the price action in currencies such as the MXN (-0.3%) and BRL (-0.7%). Nevertheless, a number of EM sovereign and quasi-sovereign credits were able to capitalise on the better market sentiment to launch or plan new dollar bond deals including Armenia, Colombia, a Brazilian development bank, and the Hungarian Development Bank.


The risk fade during the US session is continuing in Asian markets this morning. However, overnight trading volumes are very subdued due to holidays in Mainland China, Hong Kong, Korea, Taiwan and South Korea (mid-autumn festival celebrations). In addition, Japan enters a three-day weekend starting tomorrow. Those markets that are open are mostly edging lower following Thursday’s FOMC-inspired gains, led by the ASX200 (-0.2%) and the Nikkei (- 0.4%). 10yr UST yields are virtually unchanged (2.74%) as is the USD index (- 0.05%).


Yesterday’s US manufacturing, housing and jobs data flow supported those who think tapering is merely delayed to some point later this year. The September Philadelphia Fed survey rose 13.1 points to 22.3 (vs 10.3 expected) which our economists point out is the highest level since March 2011. The underlying details of the report were equally as strong across new orders (21.2 vs. 5.3 previous), shipments (21.1 vs. -0.9), and employment (12.2 vs. -2.6) which all reached new highs for the year. Existing home sales increased 1.7% MoM (vs -2.6% expected) and there was further talk of inventory shortages. Initial jobless claims for the week of September 14 increased +15k to 309k, lower than the 330k expected, but the result was again affected by technology
glitches in a couple of States.


Coming back to credit, markets will be focused on today’s bi-annual index rolls where major CDS indices in the US, Europe and Asia-Pacific will be transitioning to new on-the-run series. That aside, US credit markets are gearing up for another jumbo bond deal, fresh from last week’s recordbreaking Verizon bond deal which continues to do quite well in the secondary. Just like the Verizon deal, the potential high yield bond deal from Dell will be used to finance a company buyout. According to Reuters, the Dell deal is expected to be north of US$3bn in size, forming part of a $14bn debt financing package for the management-led buyout of the PC-maker for close to $25bn. The deal seems to be well timed with latest retail flows data showing US highyield fund inflows more than doubled this past week, with a $1.4 billion inflow in the week ended Sept. 18 compared to just $632m for the week ended Sept. 11, according to Lipper data. The latest weekly inflow is the biggest in eight weeks, and it takes the four-week-trailing average back into the black, at positive $417m.


In Europe, the much-anticipated German elections will be held on Sunday and the press is filled with analysis of potential scenarios ranging an existing Merkel-led conservative coalition; a potential grand coalition with the SPD, and a less market-friendly leftist coalition consisting of the SPD, Greens and Left Party. According to Reuters, for the first time a new German anti-euro party has cleared the 5% threshold for entering parliament, citing an INSA poll for Bild Daily. The poll put Merkel's conservatives on 38% and the FDP on 6%, giving a combined total of 44% - one ppt lower than the total for the three leftof- centre parties. The poll, conducted after last Sunday's state election in Bavaria, gave the eurosceptic Alternative for Germany (AfD) 5%, which is the threshold needed to enter the Bundestag. It put the opposition Social Democrats (SPD) on 28%, the Greens 8% and the hardline Left on 9%.

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