Overnight Carry Continues To Push Risk To New Highs

There were two events of note in the overnight session: first was the return of the Japanese jawboning, because now that the Nikkei has upward momentum - nearly hitting 15600 in early trading only to close unchanged - and the Yen has downward momentum, the Abe, Kuroda, Amari trio will do everything to talk Mrs. Watanabe to accelerate the momentum. In this case BoJ Governor Kuroda said he does not think JPY is at abnormally low levels and consumer inflation likely to hit 2% by fiscal year to March 2016. Kuroda also said he does not think JPY is excessively weak or in a bubble now and JPY has corrected from excessive strength after Lehman. This also means look forward to the daily bevy of Japanese speaker headlines in overnight trading to push the USDJPY and EURJPY higher on an ad hoc basis. The other notable event was the German IFO Business climate which jumped from 107.4 to 109.3, beating expectations of 107.7 and in the process pushing the EUR notably higher, and particularly the EURJPY which moved from 136.30 to nearly 137 or a fresh four year high. At this point European exporters must be tearing their hair out, as must the ECB whose every effort to talk the Euro lower has been met with relentless export-crushing buying.


Elsewhere in Asia, the Chinese bank regulator is said to require banks to report detailed wealth management product holdings and transaction information from 2014 sources. According to sources citing an unidentified PBOC official who has an involvement in monetary policy but not decision making said that the PBOC is to continue to force banks to deleverage and will mainly use higher money market interest rates to push banks to reduce leverage. China's financial regulators are preparing new rules to crack down on explosive growth in complex interbank transactions used to evade lending restrictions according to sources. China president to promote allies in sweeping reshuffle, according to sources. The reshuffle would allow Xi who is also party and military chief, to deepen his power base and counter opposition to the bold reforms unveiled this month at the third plenum of the party's leaders.


The US event docket is quiet with Fed speakers George and Tarullo set to appear later, while the JOLTS survey will confirm or deny recent trends in the BLS report. Mario Draghi will also speak at the 23rd European Banking Congress.


US event calendar:



  • US: Fed speakers - George (8:40), Tarullo (12:15)


Market Recap from RanSquawk


Stocks traded mixed in Europe, with health care outperforming after SMI listed Novartis announced that it is  starting a USD 5bln share buyback program. In spite of the somewhat lacklustre performance by equity markets this morning, Bunds traded lower, underpinned by the release of much better than expected German IFO survey, which also encouraged broad based EUR supportive flows. Consequent EUR strength saw the major pair reclaim the 1.3500 level, while EUR/JPY advanced towards the 137.00 level, touted option barrier level. At the same time, in spite of a weaker USD, AUD remained under pressure, as market participants continued to fret over potential intervention by the RBA and also digested source comments citing an unidentified PBOC official who has an involvement in monetary policy but not decision making, stating that the PBOC is to continue to force banks to deleverage and will mainly use higher money market interest rates to push banks to reduce leverage, which resulted in the Australian 10y yield surging to its highest level since November 2011 during the overnight session. Going forward, market participants will get to digest the release of the latest Canadian CPI and Retail Sales reports.


Overnight news bulletin from Bloomberg and Ransquawk



  • BoJ Governor Kuroda said he does not think JPY is at abnormally low levels and consumer inflation likely to hit 2% by fiscal year to March 2016.

  • German business confidence rose to 109.3 in November (est. 107.7) from 107.4 in October, the highest since April 2012

  • BOE chief economist Spencer Dale said the central bank will raise interest rates when it’s seen a “sustained recovery and the economy is strong enough to stand it. The message we’ve been giving to businesses is that we don’t think that’s anytime soon”

  • CME cuts initial margins for crude oil, gold futures.

  • Treasuries 5Y and longer headed for weekly loss while 2Y and 3Y posting gains as expectations for strengthened forward guidance and QE tapering as early as next month spur curve steepening.

  • The ECB said it would suspend early repayment of 3-yr LTROs for the year-end period; last repay will be settled Dec. 23, those scheduled for Dec. 30 and Jan. 8 won’t occur, will resume on Jan. 15

  • RBA Governor Glenn Stevens said that while the central bank has been unconvinced about the effectiveness of trying to drive down AUD, he remains “open-minded” on currency intervention

  • BOJ’s Kuroda, speaking in Parliament, said he does not think the yen is “excessively weak”

  • Europe’s biggest banks, led by Lloyds Banking Group Plc and Deutsche Bank AG, have racked up more than $77b in legal costs since the financial crisis, five times their combined profit last year

  • Global investors’ confidence in Obama plunged during the past two months after the government shutdown, a new poll shows, even as stocks traded at record highs and bond yields remained near historic lows

  • Talks aimed at resolving the dispute over Iran’s nuclear program resumed today with EU chief diplomat Catherine Ashton seeking to win backing from the six powers attending for an interim deal

  • Sovereign yields mostly higher, EU peripheral spreads narrow. Asian stocks mixed, European stocks fall, U.S. equity-index futures mostly lower. WTI crude lower, copper little changed, gold higher


 


Asian Headlines


BoJ Governor Kuroda said he does not think JPY is at abnormally low levels and consumer inflation likely to hit 2% by fiscal year to March 2016. Kuroda also said he does not think JPY is excessively weak or in a bubble now and JPY has corrected from excessive strength after Lehman.


China bank regulator to require banks to report detailed wealth management product holdings and transaction information from 2014 sources.


- According to sources citing an unidentified PBOC official who has an involvement in monetary policy but not decision making said that the PBOC is to continue to force banks to deleverage and will mainly use higher money market interest rates to push banks to reduce leverage.


- China's financial regulators are preparing new rules to crack down on explosive growth in complex interbank transactions used to evade lending restrictions according to sources.


China president to promote allies in sweeping reshuffle, according to sources. The reshuffle would allow Xi who is also party and military chief, to deepen his power base and counter opposition to the bold reforms unveiled this month at the third plenum of the party's leaders.


EU & UK Headlines


German IFO Business Climate (Nov) M/M 109.3 vs Exp. 107.7 (Prev. 107.4)
- German IFO Current Assessment (Nov) M/M 112.2 vs Exp. 111.5 (Prev. 111.3)
- IFO Expectations (Nov) M/M 106.3 vs Exp. 104.0 (Prev. 103.6)


Goldman raises 2014 euro zone growth forecast to 1.1% from 0.9%.


ECB suspends early repayments of 3-year LTROs during year-end holiday, adding that the fact that LTRO repayment suspension is also due to concentration of other operations. As such, the last 2013 LTRO repayment to settle Dec 23.


- Analysts at BNP Paribas note that large ECB LTRO repayment may be seen on Dec-23rd before year-end suspension could result in volatility in EONIA fixing and also short-end of the curve


Of note, the 3-month Euribor Interest rate fixed at 0.223% vs. Prev. 0.217%, as market participants were forced to reprice probability of the ECB introducing negative deposit rates after Draghi downplayed such a move when he spoke yesterday.


As a guide, Sueddeutsche Zeitung reported that Greek PM Samaras is expected to ask for a lightening of his country's huge debt when he meets German Chancellor Angela Merkel in Berlin on today.


Barclays month-end extensions: Euro Aggr (+0.04y)


Barclays month-end extensions: Sterling Aggr (+0.06y)


US Headlines


A bitterly divided Senate voted yesterday to eliminate filibusters for most presidential nominees, step that limits the ability of Republicans to block President Obama's choices for executive-branch and most judicial posts. Barclays month-end extensions: Treasuries (+0.10) - Of note, although the avg. is around 0.06y, larger than avg. increase had been expected given the 3y, 10y and 30y refunding auctions last week.


Equities


Stocks failed to benefit from the release of better than expected German IFO report, as market participants were seen booking profits after the Dow Jones closed above the key 16,000 points mark for first time ever yesterday. As a result, stocks traded mixed, with health care outperforming after SMI listed Novartis announced that it is starting a USD 5bln share buyback program.


FX


EUR gained ground across the board following the release of much better than expected German IFO report. Consequent trigger of buy stops on the break of 1.3500 level, as well as option related flow linked to touted barrier in EUR/JPY at 137.00, ensured that the pair was able to hold onto gains even as risk on sentiment subsided.


In spite of a weaker USD, AUD remained under pressure, as market participants continued to fret over potential intervention by the RBA and also digested source comments citing an unidentified PBOC official who has an involvement in monetary policy but not decision making, stating that the PBOC is to continue to force banks to deleverage and will mainly use higher money market interest rates to push banks to reduce leverage.


NZD is also seen weaker, after RBNZ's McDermott said NZD is overvalued and little monetary policy can do about FX rate.


McDermott said would like to see lower exchange rate, but added that intervention unlikely to sustainable lower NZD.


Commodities


CME lowers crude oil futures NYMEX (CL) initial margins for specs by 9.1% to USD 3,740/Contract from USD 4,070.
- Lowers COMEX 100 gold futures (GC) initial margins for specs by 9.4% to USd 7,975/contract from USD 8,800.
- Lowers COMEX 5000 silver futures (SI) initial margins for specs by 11.1% to USD 11,000/contract from USD 12,375.
- Lowers COMEX copper futures (HG) initial margins for specs by 14.3% to USD 3,300/contract from USD 3,850.
- Lowers COMEX RBOB gasoline futures (RB) initial margins for specs by 5.6% to USD 4,675/contract from USD 4,950.


Iran expects its crude oil exports to China will stabilize despite political pressure from the US and a drop in shipments so far this year according to executive at Iran's state oil company


Iranian Foreign Minister Zarif says enrichment will always remain part of a deal, considerable progress in talks made and sides will continue negotiating differences.


Germany cuts gold holdings by 3.421 tonnes to 3,387.247 tonnes in October according to IMF data. Data shows Turkey gold holdings up for fourth straight month.


China to start interbank gold swap trading on November 25th, gold swaps to trade on China Foreign Exchange Trade System, to Settle and deliver via Shanghai Gold Exchange.


SocGen summarizes the key macro developments


Only time will tell whether the market is over-reacting to the largely priced-in message of the Fomc minutes by pushing the UST 10y yield over 2.80% and EM currencies into a tailspin, but the contrast with the benign reaction to Yellen's dovish signal a week ago could not be greater. The steepening of the US 2y/10y curve through the August high of 253bp leaves it only 25bp away from the 2009 high, a level that should be reached comfortably if strong incoming US data raise the suspense of earlier Fed tapering. It underlines the fact that the message of forward guidance has been understood by the market, but low rates for longer does not bring relief for currencies where correlation with the US 10y yield is strong. As USD/BRL gapped higher at the open, we cast our mind back to 2012 when similar price action propelled the pair 5.5% higher in subsequent weeks. From the current level, that implies a rally above 2.40. The pressure is on the BCB next week to deliver a rate hike.


In Europe, German Chancellor Angela Merkel is a step closer to forming a new government after accepting the Social Democratic Party's (SPD) minimum wage demand. This has been the bone of contention between Merkel's party and the SPD and the differences threatened a possibility of ‘fresh elections' during the week. Merkel's move comes as a positive for the EUR. The German IFO survey today is expected to be a mixed bag with business climate dropping slightly to 107.3. A positive surprise is not ruled however out after a gain in the manufacturing PMI to 52.5. This would help to support bullish momentum in EUR/AUD and EUR/JPY after ECB president Draghi yesterday advised investors not to infer negative deposit rates. Draghi is slated to speak again this morning at 09:30 CET.


We conclude the overnight recap with DB's Jim Reid


Also getting more expensive are equities with the Dow closing above 16000 for the first time and the S&P 500 (+0.81%) closing just shy of 1800 at 1796. Indeed according to Bloomberg data, the Dow and S&P500 are trading at their highest P/Es in almost four years while the Dow Jones is trading at its lowest dividend yield in 6 years. Both the Dow and S&P500 have managed to erase their losses incurred over the first half of this week, including those caused by a  relatively hawkish set of FOMC minutes on Wednesday. This came despite a number of earnings and outlook downgrades from US retailers yesterday including Target (-3.5%) and Dollar Tree (-4.5%) – coming exactly one week before Black Friday that marks the traditional start of holiday season sales. The weakest Philly Fed survey since May (6.5 vs 19.8 prior and 15.0 expected) saw equities rally on the hope that it may reduce the chances of a 2013 Fed taper. This survey seemed to confirm a weaker patch for manufacturing following a similarly soft Empire Fed survey from earlier in the month. But it was slightly at odds with yesterday’s Markit PMI which rose to 54.3 in November from 51.8 in October. Initial jobless claims for the week of November 16, which correspond to the survey period for November payrolls, fell -21k to 323k (vs 335k expected) after the prior week was revised up +5k to 344k. Yesterday’s claims data leaves DB’s Joe Lavorgna positive on November’s payrolls which he expects will come in at +185k. October PPI was pretty much in line with consensus (+0.3% YoY).


The release of the Philly Fed survey provided some respite for treasuries where 10 year yields had reached an intraday high of 2.83%, the highest level for two months. Yields rallied to close about 1.5bp lower at 2.78% and outperformed relative to what was a weaker day for European government bonds. Indeed, European markets underperformed their American counterparts across equities, credit and rates yesterday as Europe reacted to a confluence of factors including the FOMC minutes from late Wednesday; a disappointing round of flash Euroarea PMIs and Draghi downplaying recent Bloomberg reports that the ECB is considering negative rates. Elsewhere the US Senate Banking Committee affirmed Janet Yellen’s nomination 14 votes to 8, as was largely expected, and there was talk that the final senate vote will be held on week of Dec 9th.


Turning to Asia, Japanese equities were once again leading Asian bourses higher following the recent rise in USDJPY (+1.1% yesterday) but some of those gains have been pared. There are also some company-specific stories behind today’s rise. This includes Sharp Corp, which is up 7% on reports that it will begin producing smartphone panels for companies outside of Apple; and Softbank which is up 3% on reports that a well-known US activist investor has disclosed a $1bn stake. Other Asian equities are trading around 0.25% to 0.5% higher. In China, there are more reports of a squeeze in China’s funding markets including headlines suggesting that some Chinese banks will suspend mortgage approvals from November onwards and that the country’s financial regulators are preparing new rules to crack down on the growth in complex interbank transactions used to get around lending restrictions (Bloomberg). There are also reports that the PBoC will continue to request that banks deleverage into year end.


Looking at the day ahead, the European data docket will be highlighted by German IFO and Italian retail sales There’s a few central bank speakers including Draghi who speaks at the 23rd European Banking Congress. In the US, the Fed’s Bullard will be speaking and the JOLTs labour report is also scheduled today.

Sign Up

Get the InvestingChannel
Free e-Letter Today

Learn More

Independent market opinion, analysis and ideas - delivered every business day

Premium market opinions, analysis, and ideas - delivered every business day

Editor's Picks