Futures Ramp On Declining European PMIs, Japan "Wealth Effect" Warning, China Tightening Fears

In addition to the already noted repeat spike in Chinese overnight repo rates as the PBOC refuses to inject liquidity for nearly a week offsetting the "news" of a better than expected HSBC PMI, the other kay datapoints to hit in the overnight session were various European PMIs which were broadly lower across the board. Of note being the French, which missed both the Manufacturing Index (49.4 vs 50.1 expected, down from 49.8) and the Services (50.2 vs 51.0 expected, down from 51.0) and Germany, which missed in Services (52.3 vs 53.7 expected, same as September), while modestly beating Manufacturing at 51.5 vs 51.4 expected, up from 51.1 last.  On a blended basis, the Composite Flash PMI fell from 52.2 to 51.5, against the consensus expectation of a modest rise (Cons: 52.4). Today's correction brings to a halt a series of six consecutive monthly rises in the Euro area composite PMI.


The final reading of the Euro area Composite PMI, which includes data for Italy and Spain, will be available on November 6. However, as Goldman notes, given that the deterioration in the services sector at the Euro area aggregate level (1.3pt) was broadly similar to that in Germany (1.4pt) and larger than in France (0.8pt), this suggests significant deterioration (of around 1.6pt) in the services sector among Euro area periphery countries.


The deterioration looked as follows:




That covers China and Europe. In Japan, we got the first official warning on roughly the one year anniversary of Abenomics, that things are starting to break. Moments ago, Economy Minister Amari warned that since the stock market surge has halted, the "wealth effect" is now in danger, even as wages continue to tumble and energy and food input costs are soaring.  No really: from Bloomberg - Japanese stocks are struggling to break through a wall at 14,800 yen, and the wealth effect from rising stock prices is stopping there. More:



  • AMARI: EFFECTS OF STOCKS ON JAPAN CONSUMPTION SEEN PAUSING

  • AMARI: ECONOMIES OF JAPAN EXPORT DESTINATIONS WEAKENING A BIT

  • AMARI: JAPAN PRIVATE CONSUMPTION GROWTH SEEN PAUSING LATELY


So following this bevy of bad news, one would expect that a glance at US equity futures would reveal nothing but green. Sure enough: futures are currently spiking +8 on what else but hope that Bernanke and Yellen will keep the firehose on max while ignoring everything else.


Overnight news bulletin from BBG and Ran



  • Chinese HSBC Flash Manufacturing PMI (Oct) M/M 50.9 vs. Exp. 50.4 (Prev. 50.2); New orders at 7 month high.

  • China’s benchmark money-market rate rose the most since

    June while the Shanghai Composite Index fell to a one-month lows policy

    makers drained cash from the financial system amid signs of a pickup in

    the economy

  • Eurozone Manufacturing PMI (Sep F) M/M 51.3 vs. Exp. 51.4 (Prev. 51.1) and German Manufacturing PMI (Oct A) M/M 51.5 vs. Exp. 51.4 (Prev. 51.1).

  • Going forward, market participants will look forward to the release of the latest weekly jobs data, trade balance and another round of earnings from the US (Inc. MSFT, AMZN, F).

  • Treasuries steady, 10Y yield holding near July lows as market focus begins to shift to next week’s 2Y/5Y/7Y auctions, FOMC meeting with rate decision on Oct. 30.

  • Banks would have to hold enough easy-to-sell assets to survive a 30-day credit drought under a rule to be proposed today by the Fed; may have the greatest effect on banks with big trading operations such as JPMorgan and Goldma

  • Era of easy money is shaping up to continue into 2014 as policy makers react to another cooling of global growth, led by weakening in developed nations, stagnant job growth in industrial world

  • Janet Yellen’s No. 1 challenge as Fed’s next chairman is to reverse the confusion in markets left by Bernanke's communications strategy, TD strategist Richard Gilhooly says in interview

  • The central banks of Norway and Sweden left rates unchanged at their respective meetings today; the Riksbank signaled it may keep rates on hold lower than previously assessed, while the Norges Bank noted lower than expected inflation and the depreciating krone

  • Sovereign yields higher, EU peripheral spreads widen. Asian equities mixed, European stocks and U.S. equity-index futures gain. WTI crude, gold and copper rise


Market Re-Cap from RanSquawk


The risk on sentiment, as evidenced in firmer stocks which gapped higher at the open in reaction to the release of better than expected HSBC flash manufacturing PMI out of China (8-month high), failed to weigh on fixed income products, with Bunds trading steady ahead of various coupon/redemption payments from a number of EU states. The move higher in Europe was driven by industrials and oil & gas sectors, with financials not too far behind in spite of bear steepening of the Euribor curve. The SMI index underperformed; with Credit Suisse trading lower by over 2% after the bank failed to meet analyst expectations and also announced plans to overhaul its interest rate trading business.


Yet again, the move higher in money market rates in China, which saw the seven-day repo jump to 4.5%, which is the highest level since national holidays, resulted in Chinese stocks underperforming its regional peers. However despite the latest up tick in money market rates, there is little evidence to suggest that the PBOC will announce measures to boost liquidity at this stage with analysts at Deutsche Bank noting that recent moves are not outside the historical range of volatility.


Looking elsewhere, the release of somewhat less than impressive Eurozone based PMIs managed to offset the positive sentiment which carried over from the overnight session and meant that EUR/USD traded steady, with EUR/GBP capped by the 200DMA line. Going forward, market participants will look forward to the release of the latest weekly jobs data, trade balance and another round of earnings from the US (Inc. MSFT, AMZN, F).


Asian Headlines


Chinese HSBC Flash Manufacturing PMI (Oct) M/M 50.9 vs. Exp. 50.4 (Prev. 50.2); New orders at 7 month high.


China's central government will not introduce any bailout package or have large-scale stimulus policy as it did in 2008, according State Information Centre economist Fan Jianping.


EU & UK Headlines


ECB's Mersch says new long-term LTRO might not be necessary, but all options are open.
Eurozone Manufacturing PMI (Sep F) M/M 51.3 vs. Exp. 51.4 (Prev. 51.1)
Eurozone Services PMI (Sep F) M/M 50.9 vs. Exp. 52.2 (Prev. 52.2)
German Manufacturing PMI (Oct A) M/M 51.5 vs. Exp. 51.4 (Prev. 51.1)
German Services PMI (Oct A) M/M 52.3 vs. Exp. 53.7 (Prev. 53.7)
French Manufacturing PMI (Oct P) M/M 49.4 vs. Exp. 50.1 (Prev. 49.8)
French Services PMI (Oct P) M/M 50.2 vs. Exp. 51.3 (Prev. 51.0)


Analysts at UBS expects coalition talks in Germany to now go on until about end-November. Although many topics on the list are contentious, analysts see a good chance that this deadline is met. If then a postal ballot among the c470,000 SPD members on the draft contract is positive, Mrs Merkel will be re-elected chancellor in the last Bundestag hearing before the winter holiday, and the new government will be in place.


Barclays month-end extension: Euro Agg +0.08y
Barclays month-end extension: Sterling Agg +0.02y


US Headlines


Sen. Jeanne Shaheen, who is up for re-election in 2014, wrote to Obama on Tuesday and asked him to delay the enrollment deadline for the individual mandate.


“Given the existing problems with the website, I urge you to consider extending open enrollment beyond the current end date of March 31, 2014,” Shaheen wrote to the president. "Allowing extra time for consumers is critically important so they have the opportunity to become familiar with the website, survey their options and enroll.”


Analysts at Citi say the exact timing of the start of Fed tapering is highly uncertain, but now expect that tapering will be pushed back to March, with asset purchases not ending fully until late 2014.


Barclays month-end extension: Treasury +0.06y.


Equities


Stocks traded higher, with industrials and oil & gas sectors outperforming, as market participants reacted to the release of better than expected HSBC flash manufacturing PMI data out of China. However the SMI index in Switzerland underperformed, with Credit Suisse trading lower by over 2% after the bank failed to meet analyst expectations and also announced plans to overhaul its interest rate trading business.


FX


In spite of the risk on sentiment, supported by the release of better than expected HSBC flash manufacturing PMI from China, yet another rise in money market rates in China meant that USD/JPY failed to benefit from the positive sentiment. As a result, the pair traded steady, in close proximity to the 200DMA line.


RBA deputy governor Lowe said AUD may realign as mining boom wanes and the global economy recovers. Lowe added that weaker AUD since April is a welcome development, adding that the impact of low interest rates evident and has further to run. RBA's Lowe further stated that inflation is only a touch higher, overall still looks pretty benign and commented that high exchange rate is the biggest structural headwind to the economy.


Commodities


Goldman Sachs said it expects gold prices to fall in 2014 driven by improving US economic data, rising real rates and the commencement of tapering of monetary stimulus by the Fed. The bank expects gold price to decline to USD 1,144 per ounce in 2014. Separately, gold seen by UBS analysts having more to gain on bank regulation.


Silver market seen in surplus next year, according to analysts at HSBC.


Nyrstar lowered forecast for zinc output from own mines to 265-280ktons from 300-400ktons previously.


An Iranian lawmaker has said that the nation has halted enriched uranium production up to 20%, therefore a few steps from which experts believe nuclear weapons can be produced. However, no other Iranian officials at this point in time have confirmed this news.


The US are said to be 'very concerned' about Turkeys potential missile deal with China and are holding discussions with Turkey, according to the US Ambassador.

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