Equities Act Weak, Confused Following Oscar-Worthy Good Cop, Bad Cop Performance By The Fed

As non-collocated, carbon-based traders walk in today, they are once again greeted by a very unfamiliar shade of green in the equity futures market. There has not been a specific catalyst for another day of equity weakness however it started in Asia, where we again witnessed a bout of EM vulnerability led by the likes of Indonesia. This follows weakness in EM across EMEA and LATAM yesterday that saw major EM sovereign CDS about 3-5bp wider while a number of LATAM 10yr rates were up between 5-10bp. EM FX in EMEA was under some pressure yesterday as well (PLN and ZAR notably), but this abated as the day wore on. This morning Indonesia CDS is quoted about 6bp wider while cash bonds are down about half to 1 point. Asian EM FX is generally weaker across KRW, INR and IDR. Asian equities have been sold from the open today including a 2% drop in the Jakarta Composite index which is on track for its largest fall since Sept 30th. The disappointment over lack of detail from the Chinese government’s Third Plenum meeting is showing up via a 2.0% drop in the HS China Enterprises Index and 1.3% drop in the Hang Seng.


In Europe, stocks also traded lower, with the FTSE-100 index underperforming its peers where a number of blue-chip companies traded ex-dividend. Overall, financials and basic materials sectors led the move lower, where UniCredit shares fell over 4% as credit spreads widened (iTraxx subFin index up 6bps). The focus was very much on the UK, where market participants digested the release of better than expected jobs report and then the latest Quarterly Inflation Report by the BoE, who brought forward likelihood of 7% jobless rate to 2015 Q3. As a result, GBP outperformed its peers and the short-sterling strip bear steepened as market participants reassessed future interest rate path. Looking elsewhere, softer stocks supported Bunds, which edged higher after supply from Italy and Germany was successfully absorbed.


As DB notes, it appears that markets continue to steadily price in a greater probability of a December taper judging by the 2bp increase in 10yr UST yields, 1.2% drop in the gold price and an edging up in the USD crosses yesterday. Indeed, the Atlanta Fed’s Lockhart, who is considered a bellwether within the Fed, kept the possibility of a December tapering open in public comments yesterday. But his other comments were quite dovish, particularly when he said that he wants to see inflation accelerate toward 2% before reducing asset purchases to give him confidence that the US economy was not dealing with a “downside scenario”. Lockhart stressed that any decision by the Fed on QE would be data dependent - so his comments that the government shutdown will make coming data "less reliable" than might otherwise have been, until at least December, were also quite telling. The dovish sentiments were echoed by Kocherlakota, a FOMC voter next year.


In other words, an Oscar-worthy good-cop/bad-cop performance by the Fed's henchmen, confusing algotrons for the second day in a row.


Going forward, the US Treasury will auction off USD 24bln in 10y notes, while Cisco will report after the closing bell on Wall Street. After the US market close, Bernanke will be speaking at townhall of teachers on the history of the Fed. He will be taking Q&A.


 


Overnight news bulletin from Bloomberg and RanSquawk



  • BoE brings forward likelihood of 7% jobless rate to 2015 Q3, cuts forecast for near-term inflation on lower data and GBP.

  • UK Jobless Claims Change (Oct) M/M -41.7K vs Exp. -30.0k (Prev. -41.7k, Rev. to -44.7k) - 12th straight monthly decline.

  • German government advisers see 0.4% 2013 growth, 1.6% in 2014 vs. Exp 2013 GDP of 0.5% and 1.70% in 2014.

  • Treasuries gain, led by belly of curve; 10Y yield retreat from highest level since mid-Sept. as stocks decline across the globe, copper falls.

  • Focus remains on timing of any Fed decision to taper asset purchases; Yellen may shed light at tomorrow’s confirmation hearing. Lockhart yday said taper would likely be considered in December; Kocherlakota said tapering could impede economy’s slow progress

  • 10Y notes to be sold today yield 2.790% in WI trading; drew 2.657% at October auction and 2.946% in Sept., which was highest since June 2011

  • Bank of England Governor Mark Carney signaled that officials may consider raising interest rates sooner than they previously forecast as the U.K. economy recovers “robustly” and inflation slows * U.K. unemployment declined to 7.6% in 3Q, closer to the  BOE’s key threshold, while a narrower measure of joblessness fell for a 12th month in October

  • U.K. Deputy Prime Minister Nick Clegg will distance himself from David Cameron’s call for permanently lower state spending, saying his Liberal Democrats aren’t ideologically wedded to budget cuts

  • Merkel’s willingness to compromise with the Social Democrats to form a coalition risks rolling back steps taken by her predecessor that made Europe’s biggest economy stronger, her Council of Economic Experts said

  • Former President Bill Clinton endorsed altering a key provision of Obamacare, saying Obama should keep a pledge he repeatedly made in campaigning for the law that Americans wouldn’t lose coverage they liked when it took effect

  • China elevated the role of markets while maintaining the state’s dominance in the nation’s economic strategy, seeking to balance finding new sources of growth with sustaining the Communist Party’s grip on power

  • Sovereign yields mostly lower, EU peripheral spreads widen. Asian and European stocks, U.S. equity-index futures fall. WTI crude, and gold gain; copper lower


Asian Headlines


On the Chinese third plenum, Goldman Sachs says China Plenum is 'insufficient' to drive China stocks up.


Separately S&P's Kim Eng Tan says the implementation of reforms that support the decisive role of market forces in the allocation of resources could in turn support the long term sovereign credit ratings on China. In other news, Morgan Stanley says China to cut interest rates twice in 2014.


BoJ's Miyao said won't rule out any steps in advance if BoJ were to act again.


EU & UK Headlines


BoE brings forward likelihood of 7% jobless rate to 2015 Q3, cuts forecast for near-term inflation on lower data and GBP.


BoE's Carney said constant rate scenario shows potential advantages of keeping rates unchanged after hitting 7% unemployment. He also did not rule out lower jobless threshold to 6.5% from 7.0%. Forecasts are based on market expectations, not nominal rates and uses market forecasts of key rate reaching 1% by 2015 Q4.


UK Jobless Claims Change (Oct) M/M -41.7K vs Exp. -30.0k (Prev. -41.7k, Rev. to -44.7k) - 12th straight monthly decline.
- ILO Unemployment Rate 3-months (Sep) 7.6% vs. Exp. 7.6% (Prev. 7.7%)
- Employment Change 3M/3M (Sep) 177K vs. Exp. 113K (Prev. 155K)
- Claimant Count Rate (Oct) M/M 3.9% vs Exp. 3.9% (Prev. 4.0%) - lowest Since Jan 2009
- Average Weekly Earnings (Sep) 3M/Y 0.7% vs Exp. 0.7% (Prev. 0.7%, Rev. to 0.8%)
- Weekly Earnings ex Bonus (Sep) 3M/Y 0.8% vs Exp. 0.9% (Prev. 0.8%)


German government advisers see 0.4% 2013 growth, 1.6% in 2014 vs. Exp 2013 GDP of 0.5% and 1.70% in 2014.


Eurozone Industrial Production SA (Sep) M/M -0.5% vs Exp. -0.3% (Prev. 1.0%)


Eurozone Industrial Production WDA (Sep) Y/Y 1.1% vs Exp. 0.0% (Prev. -2.1%) - biggest gain since September 2011.


Italy successfully sold EUR 5.468bln (vs. exp. EUR 5.5bln) in 3y, 30y and CCTeu bonds. The shorter dated paper was sold at lowest yield since March 2010. Germany also sold EUR 4.032bln in 0.25% 2015, b/c 2.2 (Prev. 2.3) and avg. yield 0.1% (Prev. 0.19%), retention 19.4% (Prev. 15.18%).


US Headlines


PIMCO's Bill Gross raised the percentage of Treasuries and other US government-related debt in his flagship fund in October after the Federal Reserve unexpectedly maintained its bond purchases.


CME Group has substantially raised transaction fees for the first time in four years as it flexes its pricing muscle as the dominant US futures exchange operator.


Equities


Risk averse sentiment dominated the session this morning, with the FTSE-100 index underperforming its peers where a number of blue-chip companies traded ex-dividend. Overall, financials and basic materials sectors led the move lower, as credit spreads widened (iTraxx subFin index up 6bps) and Bunds moved into positive territory after supply from Italy and Germany was absorbed.


FX


GBP outperformed its peers, driven by the release of better than expected jobs report and also the release of the latest Quarterly Inflation Report by the BoE, who brought forward likelihood of 7% jobless rate to 2015 Q3. As a result, the pair managed to recover some of the losses made yesterday following the release of softer than expected inflation data.


RBNZ Financial Stability Report said the NZD remains elevated, and timing and size of interest rate increases are uncertain. RBNZ's Wheeler said interest rates are likely to rise.


Commodities


Commerzbank's technician Axel Rudolph says that a slip through the six-month support line at USD 1270.16 will confirm bearish outlook.


AMCU lowered basic wage increase demand to ZAR 8,668 from ZAR 12,500, according to Impala spokesman. Also, according to AMCU, Impala Platinum raises wage offer to union by 0.5%. It was also reported that Amplats security disperses protest with rubber bullets, according to SAFM.


The Israeli PM Netanyahu has called for Western countries to trim their dependency on oil for the transportation sector due to the instability of the commodity.


Libya's Zawiya refinery has reopened, according to the National Oil Corp


Following last month's late payment by Ukraine to Russia, Ukraine has said it does not need to buy any Russian gas before the year's end.


Key Macro/FX highlights from SocGen


Let's hear it from the horse's mouth this morning: does BoE governor Carney now believe that the UK unemployment rate threshold of 7% will be reached earlier than it though t back in August? GBP is not an outright buy vs the USD if that is the case (UK real rates are falling vs the US), but sterling should stay bid vs the currencies where deflationary or disinflation pressures reign supreme, ie the Scandis, the EUR and the Swiss Franc. EUR/GBP did well yesterday to reach back over the 50d ma (0.8440) but this should be as good as it gets if the BoE revises up its short-term growth and inflation forecast. UK rate hike expectations have eased back thanks to the delayed tapering in the US, but short sterling may not easily be swayed by the governor to give up pricing in a first hike at the turn of 2014/2015 in particular if the employment data due one hour ahead of the QIR shows a fall in the unemployment rate to 7.6%.


UST 10y yields traded a 2.79% high yesterday (swaps 2.92% high) giving the USD free rein to strengthen vs its major counterparts. Scandi currencies continued to take a beating after CPI data showed Sweden slipped into deflation in October. Whether that leads the majority on the Riksbank committee to give in to the two doves Ekholm and Flordenand vote for a 25bp rate cut at the December meeting remains to be seen, but the high correlation with US 10y yields suggests there is further upside potential for USD/SEK. Also keep an eye on USD/JPY. As the pair approaches 100.00, short-term vol has started to pick up.


Bank of Indonesia, in a surprise decision yesterday increased its benchmark reference rate by 25bps to 7.25% a move aimed at easing its current account shortfall. Meanwhile, INR depreciated for a 9th day in a row (MSCI EM down for an 8th day on trot) and there could be more pain for the rupee after weaker industrial output (+2% yoy) and higher inflation (10.09%) sparked worries of stagflation.


The RUB took no solace from the flash GDP estimate yesterday (Q3 GDP +1.2% yoy in Q3). The central bank widened tio corridor by 5 kopeks to 32.45-39.45 rubles. We believe another quarter of growth below1.5% would force CBR to cut its benchmark rate in early 2014. With EUR/HUF on the verge of 300, we will be paying close attention to the minutes of Hungary's central bank meeting. Will these provide justification to expect future policy easing after a sharp drop in CPI inflation to 0.9% in October? Next resistance is at 303.21.


DB's Jim Reid concludes the overnight event recap


It appears that markets continue to steadily price in a greater probability of a December taper judging by the 2bp increase in 10yr UST yields, 1.2% drop in the gold price and an edging up in the USD crosses yesterday. Indeed, the Atlanta Fed’s Lockhart, who is considered a bellwether within the Fed, kept the possibility of a December tapering open in public comments yesterday. But his other comments were quite dovish, particularly when he said that he wants to see inflation accelerate toward 2% before reducing asset purchases to give him confidence that the US economy was not dealing with a “downside scenario”. Lockhart stressed that any decision by the Fed on QE would be data dependent - so his comments that the government shutdown will make coming data "less reliable" than might otherwise have been, until at least December, were also quite telling. The dovish sentiments were echoed by Kocherlakota, a FOMC voter next year.


In Asia this morning, we are again witnessing a bout of EM vulnerability led by the likes of Indonesia. This follows weakness in EM across EMEA and LATAM yesterday that saw major EM sovereign CDS about 3-5bp wider while a number of LATAM 10yr rates were up between 5-10bp. EM FX in EMEA was under some pressure yesterday as well (PLN and ZAR notably), but this abated as the day wore on. This morning Indonesia CDS is quoted about 6bp wider while cash bonds are down about half to 1 point. Asian EM FX is generally weaker across KRW, INR and IDR. Asian equities have been sold from the open today including a 2% drop in the Jakarta Composite index which is on track for its largest fall since Sept 30th. The disappointment over lack of detail from the Chinese government’s Third Plenum meeting is showing up via a 2.0% drop in the HS China Enterprises Index and 1.3% drop in the Hang Seng. On this point, DB’s Jun Ma thinks further detail may be released a few days later, but it’s fair to say that the market has been a little underwhelmed thus far. US treasury secretary Jack Lew said this morning that there are “lots of questions still to be answered” on Chinese reforms, particularly in the area of currency.


Coming back to the issue of low inflation, European inflation has been topical recently especially following the low inflation reading for the euro area in October, the recent rate cut from the ECB and a dovish report on Draghi yesterday (Germany’s FAZ newspaper reported that Draghi is concerned about the possibility of deflation in the euro zone although he will dispute that publicly). Indeed yesterday we saw the October inflation reading in Germany confirmed at just 1.2% YoY, while in the UK the annual inflation reading was below consensus at both the headline (2.2% vs 2.5% expected) and at the core level (1.7% vs 2.0% expected). Indeed the UK’s core inflation number is at a level that was last seen in 2009. Again this ties in with the arguments made in our long-term study from September "A Nominal Problem" where we highlighted how we were having a global problem with both low real GDP and low inflation. The latter get mentioned less when talking about central bank policy, especially in connection with the US taper. In terms of the market reaction, EURGBP gained 0.75% yesterday, with the bulk of the increase coming after the UK inflation print with 10yr gilts outperforming amid a generally weakish day for fixed income.


The economic data calendar looks light again today but one highlight will be the Bank of England’s inflation report. UK employment, Eurozone industrial production and Spanish CPI are also worth looking out for today. It will be a bumper day of Italian auctions with more than $5bn in new issuance today consisting of 5yr floaters, 2016s and 2044s. After the US market close, Bernanke will be speaking at townhall of teachers on the history of the Fed. He will be taking Q&A.

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