No Open Bond Market, No Problem: Futures Rise On Another Yen-Carry Levitation To Start The Week

Bond markets may be closed today for Veterans' Day, but equities and far more importantly, FX, are certainly open and thanks to yet another overnight ramp in the ES leading EURJPY, we have seen one more levitation session to start off the week, and an implied stock market open which will be another record high. There was little overnight developed market data to digest, with just Italian Industrial Production coming in line with expectations at 0.2%, while the bulk of the attention fell on China which over the weekend reported stronger Industrial Production and retail sales, while CPI was just below expectations and additionally China new loans of CNY 506 billion (below est. of CNY 580bn) even as M2 in line, should give the Chinese government the all clear to reform absolutely nothing. That all this goldilocks and goalseeked data is taking place just as the Third Plenum (just as theatrical and just as meaningless as any session of Congress, because everyone knows that China will not initiate reforms until it has to at which point it will be too late) picks up pace was not lost on anyone.


Breakdown of China M2 and CNY loans:



And China's total social financing for October:



Today's session will be quiet with nothing on the US docket which means much more low volume levitation especially with no bond selloff to keep equities in some sort of pseudo check, while this week's key event will be Yellen's confirmation hearing on Thursday before the Senate Banking Committee. She has not discussed monetary policy since April so there will be an immense amount of interest. As DB notes, it may be a politicised hearing and one where Yellen may have to be more balanced than her natural dovish tendencies to broaden her appeal to the members.


Market Recap


Stocks in Europe recovered following a lacklustre open and edged into positive territory, although telecommunications sector underperformed throughout the session, with BSkyB trading lower by almost 10% after BT Group announced that it will pay USD 1.4bln for exclusive live broadcast rights for the UEFA Champions League tournaments. Deutsche Telekom shares also fell sharply after analysts at Goldman Sachs downgrade co. to sell and also lowered price target by 14%. Overall, the price action was relatively muted across various asset classes today, with trade volumes declining, as market participants observed Armistice Day in Europe and Veteran's Day in the US. Looking elsewhere, EUR gained ground across the board, as market participants used the heavy selling pressure observed last week as a buying opportunity. As a result, consequent pressure on the Greenback ensured that USD/JPY was able to recover losses made during the overnight session in Asia and in turn move into positive territory. Going forward, there are no major economic releases set for the second half of the session


 


Overnight news bulletin


Trade volumes fell as market participants observed Armistice Day in Europe and Veteran's Day in the US.


ECB's Coeure said ECB can trim interest rates further and provide the banking systems with liquidity.


Short-sterling strip steepened this morning as market participants positioned for the release of the Quarterly Inflation Report by the BoE this week.


 


Asian Headlines


Chinese CPI (Oct) Y/Y 3.2% vs. Exp. 3.3% (Prev. 3.1%)
- PPI (Oct) Y/Y -1.5% vs. Exp. -1.4% (Prev. -1.3%)
- Industrial Production YTD (Oct) Y/Y 9.7% vs. Exp. 9.6% (Prev. 9.6%)
- Industrial Production (Oct) Y/Y 10.3% vs. Exp. 10.0% (Prev. 10.2%)
- Retail Sales YTD (Oct) Y/Y 13.0% vs. Exp. 13.0% (Prev. 12.9%)
- Retail Sales (Oct) Y/Y 13.3% vs. Exp. 13.4% (Prev. 13.3%)


As China's Third Plenum party meeting continues, comments remain few and far between before the end of the meeting on Tuesday, however a brief statement has been released, with the Communist Party stating China needs a new engine of growth and reduce its reliance on “crude investments”.


EU & UK Headlines


ECB split stokes German backlash fears. (FT-More) Sources said divisions between northern and southern representatives on the ECB board have been mounting since market pressures on the eurozone relaxed, with council members freed up to revert to national interests.


ECB's Coeure said ECB can trim interest rates further and provide the banking systems with liquidity.


Short-sterling strip steepened this morning as market participants positioned for the release of the Quarterly Inflation Report by the BoE this week. The central bank is widely expected to upgrade its growth forecasts for the UK economy this week and pave the way for an earlier interest rate rise.


US Headlines


Fed's Williams (non-voter, soft dove) said US monetary medicine is working and evidence is in jobs gains and jobless rate. Williams said that he sees unemployment declining in 2014 and 2015. 


Equities


Stocks recovered from a lower open and edged into positive territory, though telecommunications sector underperformed from the get-go, where BSkyB shares in London fell almost 10% after BT Group announced that it will pay USD 1.4bln for exclusive live broadcast rights for the UEFA Champions League tournaments. In addition to that, Deutsche Telekom shares also fell sharply after analysts at Goldman Sachs downgrade co. to sell and also lowered price target by 14%.


SocGen's macro recap morning briefing


We finally have lift off. Or have we? Friday's US employment report blew away many uncertainties and vindicated the Fed for not issuing a more dovish statement at it last meeting. The impact of the government shutdown on the economy has been trivial and we can now look forward to hopefully undistorted period data to form a judgement on underlying momentum and implications for the Fed. Although we still see the probability of Fed tapering as quite remote in December, the likelihood of the Fed reducing asset purchases has inevitably gone up sooner rather than later and that alone now means we should see some decent trends across markets until early December.


The strong US jobs data (overshadowed again by a lower participation rate) obviously puts the USD in a pole position to strengthen and US 10y yields to rise and the curve to steepen. It also argues for the US/EU 10y spread to keep widening towards 100bp given the contrasting picture for employment in the euro area and a dovish ECB. The rise in 10y US yields above 2.70% challenges our downward revised year-end forecast but adds support to our bearish EUR/USD call. A retest of last week‘s 1.3293 low is a distinct possibility as long EUR positions are chopped, but bears may not pause for breath until we reach 1.3200.


The focus in G10 for this week will be on eurozone Q3 GDP data from Thursday onwards. In the UK, the BoE inflation report is due this Wednesday. Upward revisions to near-term inflation and growth forecasts are highly likely and might result in the bank bringing forward a decline in the unemployment rate to 7% from late 2016. That will challenge the timing of a first rate hike and should boost GBP vs CHF, EUR and JPY.


Emerging markets were hit badly last week and the toxic combination of higher US 10y yields and a warning on Brazil's credit rating by S&P lifted USD/BRL above 2.3340. Investors will brace for a return to the summer highs above 2.40 if US data keep coming in strong. The focus this week is on the possible outcome of the 3rd Plenum of China and the guidelines for economic policy. Though expectations over announcements are limited, a focus


DB's Jim Reid rounds out the overnight recap


The growth momentum in China appears to have improved over the past few months and the weekend’s October Chinese data provided further indication of this. Industrial production rose 10.3% YoY which was ahead of expectations of 10.0% and was slightly firmer than last month’s 10.2%. DB’s Jun Ma believes this adds some upside risk to Q4 GDP growth. Retail sales growth also accelerated in October (13.0% YoY vs 12.9% previous) which was in line with consensus, and fixed asset investments continued to grow at a 20%+ YoY rate. Jun describes the October CPI outcome of 3.2% YoY in October (3.3% expected) as remaining in the comfort zone, though it came in at an eight month high. PPI deflation widened to 1.5% YoY in October from 1.3%yoy in September but Jun expects that PPI inflation will recover to zero by the end Q1 next year.


Coming back to markets, the clear outperformer on Friday was DM equities where the S&P 500 (+1.3%) came back from early lows of 1747 following payrolls, before staging a remarkable recovery to close at a new all time high of 1770. The tone in emerging markets was in stark contrast, where it was a disappointing day across both equities and fixed income. The +15bp and 0.57% increase in UST yields and the Dollar index was clearly a problem. Brazilian and Mexican 10yr rates jumped by around 13bp and 7bp respectively, while the CDX EM index added 20bp in spread terms, in its weakest performance since June. The MSCI EM equity index (-1.5%) recorded its seventh straight loss which is the longest losing streak since March 2013. The weaker tone in EM on Friday is weighing on sentiment in Asia this morning including in Asian FX where a number of currencies are weaker including the KRW (-0.7%), THB (-0.7%) and IDR (-0.9%) against the USD. Asian EM sovereign credit has opened weaker particularly in Indonesia and Phillipines (both 5yr sovereign CDS are +5bp wider) but flows have been balanced in general. Despite the strong finish to DM equity markets last week, Asian equities are trading lower across most bourses with the exception of the TOPIX (+0.7%) following the payrolls-inspired gain in USDJPY. There is a fair bit of volatility in Chinese equities on the back of reports in domestic media including China Daily of potential reform plans filtering out from the Third Plenum meeting.


Across the rest of the week, there will be a lot of focus on the Fed’s thoughts on the latest payrolls data and its implications for Fed policy. Indeed, apart
from Yellen’s confirmation meeting on Thursday, we’ll get further clues to the Fed’s thinking when Bernanke speaks on Wednesday. We also have a number of other Fed speakers scattered throughout this week beginning with Kocherlakota and Lockhart tomorrow. Today is Veteran’s Day in the US, so things will probably be on the quiet side, especially on the fixed income side where a number of markets are shut (equity markets will stay open). Staying Stateside, we get our usual post-Payrolls lull in data flow. The key releases over the week will be jobless claims on Thursday together with industrial production and the NY Empire Fed manufacturing survey on Friday.


Across the Atlantic, the week gets off to a similarly slow start before we reach what will likely be the highlight for the week in the form of first estimates of Q3 GDP for the Eurozone as well as individual GDP reports for Germany, France and Italy (Thursday). Our European economists expect a growth number of around 0.2% QoQ. A two day Eurogroup/ECOFIN finance ministers’ meeting is scheduled to commence on Thursday, as will a three day Germany’s SPD party convention where we may hear more about the party’s intentions with respect to a coalition agreement with Merkel’s conservatives.


Italian industrial production (Sep) is due later today, followed by German/Italian/UK inflation on Tuesday. We get Eurozone industrial production and UK employment stats on Wednesday. The BoE publishes its quarterly inflation report on Wednesday.


In China, we’ll probably start to get further reports of various reforms being considered by the government following the conclusion of the country’s Third Plenum of the 18th Party Congress of the Communist Party on Tuesday. In Japan, money supply (Tues) and 3Q GDP (Thurs) are scheduled during the week. Japan’s economy minister Amari delivers a speech on the country’s growth strategy to parliament on today.

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