Japanese Tapering Whispers Define Overnight Session: Yen Soars, Dollar Slides, Futures Droop
Following last night's surprise event, which was China's HSBC PMI dropping into contraction territory for the first time since July, which in turn sent Asian market into a tailspin, the most relevant underreported news was a speech by International Monetary Fund Deputy Managing Director Naoyuki Shinohara who said that "As long as steady progress is being made toward the 2% target, we do not see a need for additional monetary accommodation in Japan." He added that while exit from unconventional monetary policy "is still very likely some way off for the euro area and Japan, I believe that the moment to start planning is now." This warning - an echo of prcisely what we said yesterday - promptly roiled the Yen, sending it far higher and sending the EMini futures sliding by over 10 tick in no time: a drop from which they have not recovered yet.
Additional USD weakness in the overnight session came when the EURUSD soared by 100 pips following stronger than expected PMI data first out of France, and then Germany, which modestly closed the France-Germany manufacturing gap, even if there is still a ways to go.
Elsewhere in Europe, Spain's unrecovery continued when Q4 unemployment was reported at 26.03%, higher than the Q3 25.98%, and more than expected.
FX markets have been a key focus with EUR the notable outperformer due to strong PMIs and better French data, helping GBP/USD move above the key 1.6600 level, printing the highest reading since Aug 2011. EUR and GBP strength weighed on the USD Index (down 0.5%) which pushed commodities markets higher with gold gaining further upward momentum after India's congress leader asked for a relaxation of gold import rules, freeing pent-up demand in the country. Elsewhere, CHF has strengthened amid the SNB looking to curb back on mortgage lending, with domestic banks shrinking their balance sheets and shedding foreign assets.
European equities trade mixed following on from the Asia-Pacific session which saw disappointing Chinese PMI Manufacturing and mixed pre-market earnings. Temporary support was seen following impressive PMI readings pushing bunds and T-notes to session lows which have since recovered. Notable equity specific moves in the Stoxx 600, Delhaize (+7.7%) are the outperformer following the Co.'s pre-market update, whilst Pearson (-7.5%) are the laggard after their CEO said trading conditions remain challenging.
Looking at the US data calendar, today is key day for macro releases for the week with initial jobless claims, the Markit PMI (55.0 expected) and existing homes sales. The pre-market earnings from Lockheed Martin, Southwest Airlines and McDonalds are interesting from a macro perspective as are the after-market earnings from Microsoft.
Overnight headline bulletin from Bloomberg and RanSquawk
- Treasuries gain for the first time this week as an index of Chinese manufacturing signaled a surprise contraction; factory output in the euro area expanded faster than forecast in January.
- Market focus turning to next week’s FOMC meeting, Bernanke’s last as Fed chair; most expect asset purchases to be cut by another $10b
- U.S. also sells floaters for first time next week; MS sees discount margin near 10bps given small issue size
- Lenders in China paid the lowest interest rates in two months for government deposits after the central bank pumped in more money to help meet increased demand for cash before the Lunar New Year holiday
- Australian homebuyers are borrowing at the fastest pace in four years amid record prices, straining debt levels already among the developed world’s highest as interest rates are set to climb
- Switzerland is raising the amount of capital banks must hold as a buffer to guard against mortgage writedowns as the country finds itself in the throes of its biggest property boom in two decades
- Obama carries weakening approval ratings into next week’s State of the Union address with Republicans and some Democrats saying that voters left behind in the recovery now blame him and not George W. Bush, and could punish Obama’s fellow Democrats in this year’s congressional elections
- Target Corp. will end health insurance for part-time employees in April, joining Trader Joe’s Co., Home Depot Inc. and other U.S. retailers that have scaled back benefits in response to changes from Obamacare
- Sovereign yields mixed; EU peripheral spreads widen. Asian equity markets decline, European markets mixed, U.S. equity- index futures decline. WTI crude and copper lower, gold gains
- FX markets have been a key focus with EUR the notable outperformer due to strong PMIs and better French data, with EUR/USD trading around its 50DMA at 1.3638.
- A weak USD index and India's congress leader asking for a relaxation of gold import rules, has seen gold come off its overnight lows.
- European equities trade mixed following on from the Asia-Pacific session which saw disappointing Chinese PMI Manufacturing and mixed pre-market earnings.
- Bund futures moved to a fresh high for the week, the GE 10y yield down 2.5bps following the absorption of EUR 8bln in 2-, 5-, & 7y OATs, and with above average prelim pan-Euro agg month-end extension at +0.12y
- S&P 500 futures down 0.3% to 1833.1
- Stoxx 600 down 0.1% to 335.8
- US 10Yr yield down 3bps to 2.84%
- German 10Yr yield down 2bps to 1.73%
- MSCI Asia Pacific down 1.1% to 138.4
- Gold spot up 0.7% to $1245.4/oz
Chinese HSBC Flash Manufacturing PMI (Jan) M/M 49.6 vs. Exp. 50.3 (Prev. 50.5); first contraction in 6 months. (BBG)
PBoC injected CNY 120bln via 21-day reverse repos for a total net injection of CNY 375bln for the week vs. no drain or injection last week. (BBG)
EU & UK Headlines
German PMI Manufacturing (Jan A) M/M 56.3 vs Exp. 54.6 (Prev. 54.3) - Highest since May 2011
- German PMI Services (Jan A) M/M 53.6 vs Exp. 54.0 (Prev. 53.5)
French PMI Manufacturing (Jan P) M/M 48.8 vs Exp. 47.5 (Prev. 47.0)
- French PMI Services (Jan P) M/M 48.6 vs Exp. 48.1 (Prev. 47.8)
Eurozone PMI Manufacturing (Jan A) M/M 53.9 vs Exp. 53.0 (Prev. 52.7)
- Eurozone PMI Composite (Jan A) M/M 53.2 vs Exp. 52.5 (Prev. 52.1)
- Eurozone PMI Services (Jan A) M/M 51.9 vs Exp. 51.4 (Prev. 51.0)
French Manufacturing Confidence (Jan) M/M 100 vs Exp. 100 (Prev. 100)
- French Business Confidence (Jan) M/M 94 vs Exp. 95 (Prev. 94)
Spanish Unemployment Rate (Q4) M/M 26.03% vs Exp. 26.00% (Prev. 25.98)
UK Sold GBP 3.25bln 2.25% 2023, b/c 1.67 (Prev. 1.8), 0.2bps tail (Prev. 0.2bps) avg. yield 2.87%. (BBG)
France sold EUR 7.93bln in 3.25% 2016, 1.00% 2018 and 1.00% 2019
- EUR 2.225bln 3.25% 2016, b/c 2.928 (prev. 4.98), avg. yield 0.34% (prev. 0.31%)
- EUR 1.885bln 1.00% 2018, b/c 2.233 (prev. 1.95), avg. yield 0.94% (prev. 0.74%)
- EUR 3.82bln 1.00% 2019, b/c 1.919 , avg. yield 1.24% (new line and is therefore not comparable)
Bank of Spain says Spanish GDP grew 0.3% in Q4 from Q3 and GDP unchanged in Q4 from a year ago. (BBG)
ECB president Draghi said the ECB does not see risk of deflation in Euro-area and that the Euro-area recovery is still weak, uneven and faces risk of a setback. Furthermore, Draghi said he would 'be very wary of overly optimistic forecasts'. (BBG)
BoE's McCafferty said the MPC sees no immediate need to raise interest rates even if unemployment hits 7% in the near future. McCafferty said it is appropriate to reduce stimulus only gradually when the time comes and that the BoE will say more on guidance when the jobless rate is at 7%.(RTRS/BBG)
BoE's Fisher says still some way off from raising interest rates, MPC must avoid choking off recovery. (RTRS)
Cyprus Finance Minister says 2013 recession less pronounced and forecast at 5.5% vs Prev. 7.7% contraction. (RTRS)
Barclays preliminary pan-Euro agg month-end extensions: +0.12y. Barclays preliminary Sterling month-end extensions:+0.19y
Newsflow from the US remains light, however participants will have the chance to digest weekly Jobs data, Existing Home Sales, DoE Inventories, EIA Natural Gas storage Change and earnings from McDonalds, Microsoft and Starbucks.
The frigid temperatures that remain entrenched over the central and eastern U.S. will begin to affect the southern states through the rest of the week. Winter Weather Advisories are posted for a portions of Texas for snow and freezing rain, while Hard Freeze Warnings extend from the Southeast states into northern Florida. (National Weather Service) Barclays preliminary US Tsys month-end extensions:+0.06y.
European equities are mixed following disappointing Chinese PMI Manufacturing and mixed pre-market earnings, with temporary supported provided by impressive PMI readings. Notable equity specific moves in the Stoxx 600, Delhaize (+7.7%) are the outperformer following the Co.'s pre-market update, whilst Pearson (-7.5%) are the laggard after their CEO said trading conditions remain challenging. Furthermore, Nokia shares fell just under 6.5% with Q4 revenue EUR 3.5bln vs. Exp. EUR 6.51bln (Prev. EUR 4.4bln). In sector specific moves, as expected basic materials have traded in the red alongside this overnight Chinese PMI release.
FX markets have been a key focus with EUR the notable outperformer due to strong PMIs and better French data, helping GBP/USD move above the key 1.6600 level, printing the highest reading since Aug 2011. EUR and GBP strength weighed on the USD Index (down 0.5%). Elsewhere, CHF has strengthened amid the SNB looking to curb back on mortgage lending, with domestic banks shrinking their balance sheets and shedding foreign assets. Turkish central bank has intervened in the FX market, selling USD. (BBG)
India's congress party leader Sonia Gandhi has written to government seeking to ease 80:20 gold import rule. (CNBC) A relaxation of this import rule could lead to a surge of buying due to pent up Indian demand. This alongside the USD weakness, saw gold move off the overnight lows.
Bank of America says WTI to test USD 100 amid a tight market. (BBG)
Iranian nuclear talks are said to restart next month, whilst the US are currently consulting with allies on the next steps. (AP)
SPDR gold holdings fell 0.15% to 795.85 tonnes on Wednesday vs Prev. 797.05 tonnes on Tuesday. (RTRS)
We conclude as usual with Deutsche's overnight recap from Jim Reid
After a data-light week, the highlight on today’s calendar is the latest round of global flash PMIs. On this note, China has kicked things off overnight with a surprisingly weak HSBC flash manufacturing PMI that not only fell 0.9 pts month-on-month, but also slipped below the benchmark 50.0 expansion vs contraction level. Today’s print of 49.6 (vs 50.3 expected) is the lowest print in seven months, represents the third straight monthly decline and is the biggest month-on-month drop since June 2013. There have been a number of explanations for the soft PMI number with some attributing it to anti-pollution and anti-corruption measures, but there are also those questioning whether the looming Lunar New Year had any effect on today’s data. The final China HSBC manufacturing PMI will be released at the end of this month, followed the official PMI at the start of February – both will provide more detail on manufacturing activity. The reaction from markets to today’s data has been negative, but fairly muted. S&P500 stock futures dropped about 5pts (-0.4%) and are trading at about -0.3% on the day. The Hang Seng China Enterprises index is down 2.1% (led by banks and consumer-focused names), copper is down 0.4% and the AUDUSD has shed 0.5%. Other Asian risk assets are trading softer, including the Nikkei (-0.6%) and KOSPI (-1.0%).
While we’re on the topic of China, one of the spotlights has been on the country’s shadow banking system, particularly a US$500m wealth management product named “Credit Equals Gold No. 1” which some fear may default when it comes due on January 31st. An update from Bloomberg today suggests that a coal mining project, which the wealth management product has invested in, has obtained a new mining license, permitting it to start operations and produce coal for sale. The news has raised hopes that investors in the WMP will receive a higher recovery when the product matures, and limit any systemic reaction, but it’s unclear at this stage exactly how WMP will be recovering funds for investors. Recall that last week Chinese bank ICBC had rejected calls to bail out the product which it distributed but there are reports today that ICBC may partially bailout investors in the WMP (Bloomberg). Certainly one to watch over the week or so, and something that could have broader implications for China’s burgeoning shadow lending markets.
In the absence of macro data in the Euroarea and US yesterday, the focus was on corporate earnings. On this front, yesterday’s earnings tape was fairly positive again with 80% of the 25 S&P500 companies reporting managing to beat consensus analyst earnings expectations. However only about 60% of the same 25 companies managed to beat expectations on the revenue line. We’re now about one-fifth of the way through the S&P500 reporting season and the overall data suggests that that EPS and revenue beats are running at around 60%, which is a bit lower than we’ve seen over the last several quarters. The S&P500 (+0.06%) closed with a miniscule gain but it should be noted that eight companies reported after the closing bell and all managed to beat expectations. Amongst those companies was Netflix who soared 18% in after-market trading after unveiling plans to increase pricing for some customers. eBay also rose (+12%) in after hours trading after one of its large investors proposed spinning off its PayPal business, but this idea was dismissed by the company.
Outside of the US, it’s worth noting that EM credit continues to have a poor start to the year. Yesterday saw the CDX EM index trading 13bp wider while the EMBI index widened by 1.4bp – the performance of these two indices suggests that the firmer sentiment that prevailed in December has now been largely unwound. Yesterday’s EM underperformers included a number of LATAM sovereigns such as Brazil (5yr CDS +5bp), Mexico (+4bp) and Venezuela (+30bp). Venezuela’s performance seemed to suggest that investors were not persuaded by the government’s plans to overhaul the country’s foreign currency system. It’s a similar story in EM FX with losses across BRL, MXN and TRY and the JPM EM FX index fell to its lowest level since early 2009.
In Europe, some eyebrows were raised at the size of demand for Spain’s EUR10bn jumbo 10 year debt issuance yesterday in what was the largest single bond sale that Spain has ever made. Demand was said to be around EUR40bn and it allowed Spain to cover around 20% of its funding plans for 2014. Note that on Tuesday, the IMF bumped up its estimate of Spanish growth by 3x, from 0.2% to 0.6%. Next up on the auction calendar is France who is set to auction around EUR8bn in 2yr, 4yr and 5yr bonds later today, along with 2yr, 4yr and 10yr inflation linked bonds. It was generally a softer day for government bonds on both side of the Atlantic but
the underperformer was gilts (yields +5bp) after the ILO unemployment report indicated that the jobless rate had fallen to 7.1%. Though this is just above the BoE’s forward guidance thresholds, the BoE minutes suggested that the bank was happy to maintain a wait and see approach.
Looking at the day ahead, the Eurozone PMIs will be a focus starting with the French manufacturing and service activity readings. Markets are looking for a small 0.4-0.5pt boost across the French manufacturing and service PMIs but both measures are still expected to stay well below the 50.0 threshold (consensus 47.5 and 48.1 respectively). The German PMIs follow shortly thereafter where a small improvement is expected across the manufacturing (54.6 exp) and service (54.0) indices. The composite Euroarea PMI is expected to print around the 53.0 level (vs 52.7 previous). Looking at the US data calendar, today is key day for macro releases for the week with initial jobless claims, the Markit PMI (55.0 expected) and existing homes sales. The pre-market earnings from Lockheed Martin, Southwest Airlines and McDonalds are interesting from a macro perspective as are the after-market earnings from Microsoft.