– Global Equities In “Sea Of Red” After German Industrial Data Horror, Hints Japan May Give Up On Weak Yen (ZeroHedge, Oct, 7, 2014):
While the economic data, especially out of Europe, just keeps getting worse by the day, with the latest confirmation that Europe is now officially in a triple-dip recession coming out of Germany and the previously observed collapse in Industrial Production which tumbled the most since February 2009, it was once again the Dollar and especially the New Normal favorite currency, the Yen, that was in everyone’s sights overnight, when it first jumped to 109.20 only to slide shortly after midnight eastern, when Abe repeated once again that a plunging Yen is hurting small companies and consumers – and to think it only took him 2 years to read what we said would happen in late 2012 – but also the BOJ minutes which did not reveal any addition easing, which apparently disappointed algos and triggered USDJPY slel programs, pushing the USDJPY 80 pips lower to 108.40.
The last nail in the overnight USDJPY trading range coffin was the statement by Japan Toshihiro Nikai, chairman of ruling Liberal Democratic Party of Japan’s general council, who said after meeting other LDP lawmakers, representatives of Ministry of Finance and Bank of Japan today, that the Japan government should consider a monetary policy exit strategy. Quotes Bloomberg “It could be important to get involved in this issue and the government should thoroughly examine it,” lawmaker Toshihiro Nikai said after a meeting of the ruling Liberal Democratic Party’s general council. An exit strategy should be considered was an opinion that came up at the council meeting. Nikai, the council chairman, cited fellow LDP lawmaker Seiichiro Murakami as telling the council meeting that it may be necessary to change the direction of the central bank’s policy. The council is responsible for reviewing and approving bills from LDP members before they are put to parliament.
It appears that the weak Yen, which is leading to the highest Japanese Misery Index in Japan in 4 decades, is finally manifesting itself in political disconent and is about to end Abenomics for good. At least Abe has a trusty old scapegoat friend, in the face of diarrhea, when he once again, has to exit stage left.
The overnight Asian session the tone is, on balance, firmer. The Hang Seng (+0.46%) is up for their third consecutive day. Crowds at key protest sites continue to dwindle whilst representatives from HK’s Occupy Central movement have agreed to hold formal discussions with the government. Both sides hope to start formal talks before 12 October. Chinese markets remain shut. The KOSPI is up by a modest 0.2% whilst the Nikkei is sliding. Asian IG credit spreads opened tighter overnight whilst HY benchmarks are also firmer across the board. The Asia iTraxx roll markets are currently being quoted at 22/23bp with flows broadly skewed towards sellers of protection. Broader EM sentiment is also benefiting from the sharp rally in the overall Brazilian risk complex yesterday. The Bovespa rallied 4.7% to post its biggest daily performance in two years. 5yr Brazil CDS narrowed 16bp and the BRLUSD is now about 2% higher from its Friday’s close. MSCI Asia Pacific up 0.2% to 139.53. Nikkei 225 down 0.67%, Hang Seng up 0.46%, Kospi up 0.23%, Shanghai Composite up 0.26%, ASX down 0.16%, Sensex down 0.65%.
European equities trade in a sea of red alongside the lacklustre German industrial production data which came in at its lowest level since 2009. On a sector specific basis, materials is the only sector in the green across Europe with support provided by reports that Glencore (up as much as 1.5%) is said to be laying the groundwork for potential merger with Rio Tinto (+5%) in 2015 after reaching out to Rio Tinto’s biggest investor (Aluminium Corp. of China) to gauge its interest in a potential deal, according to people familiar with the matter. To the downside, healthcare names are seeing notable outperformance with GSK (-1.7%) trading lower following a negative broker move at Kepler Chevreux. Furthermore, airlines names are also being weighed on this morning following an amalgamation of profit-taking and negative news stories including reports that a Spanish nurse has tested positive for the ebola disease, which could potentially have the scope to hamper travel across Europe. 18/19 sectors decline, led by travel and leisure, health care and financial services. Eurostoxx 50 -0.93%, FTSE 100 -0.67%, CAC 40 -0.91%, DAX -0.91%, IBEX -0.89%, FTSEMIB -0.25%, SMI -1.06%.
We’ll get more data flow today with the IBD/TIPP economic optimism (Oct) and JOLTS job openings (August) being the notable ones from the US. Fed’s Dudley and Kocherlakota are also scheduled to speak at some point today. In Europe, Industrial production data from the UK and Germany will probably be the key. We should also get the latest World Economic Outlook from the IMF today.
Market Wrap
- S&P 500 futures down 0.3% to 1949.4
- Stoxx Europe 600 down 0.7% to 333.64
- US 10Y yield down 1bps to 2.41%
- German 10Y yield little changed at 0.91%
- MSCI Asia Pacific up 0.2% to 139.53
- Gold spot up 0.1% to $1208.84/oz
Bulletin Headline Summary
- European equities trade lower across the board from the get-go amid Eurozone recession fears after German industrial production printed its lowest level since 2009.
- USD/JPY has been dragged lower following signals from Japanese officials that the JPY weakness may have reached its conclusion, with lower US yields also adding to the downside.
- Looking ahead, attention turns towards the host of central bank speakers due to comment with ECB’s Costa, Fed’s Kocherlakota and Dudley all on the speaker slate
- Treasury yields fall slightly in overnight trading as German industrial production drops the most since 2009; this week’s Treasury auctions begin with $27b 3Y (WI 1.025%), yielded 1.066% at last auction, was highest auction stop since April 2011 (1.28%).
- The Bank of Japan maintained its record stimulus as the yen traded near a six-year low and economists pushed back forecasts for further monetary easing
- Japanese PM Abe said the weak yen is hurting small companies and households; Economic Minister Amari said government trying to minimize damage of weak yen
- The largest global banks will have to hold more capital and liabilities than previously reported as regulators take on lenders deemed too big to fail
- U.S. prosecutors are discussing whether to press Deutsche Bank to plead guilty to interest-rate rigging, and they’ll probably charge at least one bank with currency manipulation this year, the New York Times reported
- The number of funds in Europe’s distressed debt market has doubled in the past two years as money managers seek to boost returns in a world of record-low interest rates
- Euro area is building history’s biggest current-account surplus. The result: mountains of money likely to buoy the world’s stock and bond markets
- Hong Kong’s protest leaders held a second round of talks with government officials, easing tensions in the streets as the city began to assess the impact of almost two weeks of demonstrations
- President Obama’s pledge to boost screening for Ebola- infected airline passengers will mean devising a way to check thousands of flights arriving daily at U.S. airports for those who are ill but symptom-free
- The U.S. is helping Ukraine plan how to keep homes and businesses heated during winter as fighting continues in the country’s eastern region
- $8.6b IG corporates priced yesterday; last Monday saw no new issues price, monthly volume just shy of $20b; $75m HY priced yesterday, five deals for $2.7b priced last week, four deals totaling $1.725b MTD
- Sovereign 10Y yields mixed with Greece rising +20.1bps. USD drops after closing at highest level since June 8, 2010 on Friday. Asian and European stocks mostly lower. U.S. equity- index futures drop. WTI crude, gold, copper fall
US Event Calendar
- 10:00am: JOLTs Job Openings, Aug., est. 4.7m (prior 4.673m)
- 10:00am: IBD/TIPP Economic Optimism, Oct., est. 45.1 (prior 45.2)
- 3:00pm: Consumer Credit, Aug., est. $20b (prior $26.006b) Central Banks
- 2:30pm: Fed’s Kocherlakota speaks in Rapid City, S.D.
- 3:00pm: Fed’s Dudley speaks in Troy, N.Y.
- 4:30pm: Fed’s Potter speaks in New York
- 1:00pm: U.S. to sell $27b 3Y notes
- 11:00am POcket Change POMO: Fed to purchase $250m-$350m TIPS in 2019-2044 sector
ASIA
JGBs traded higher by 8 ticks at 146.05 underpinned by spill-over buying in USTs during yesterday’s session and some weakness in Japanese stocks. The Nikkei 225 (-0.67%) recovered some of the earlier losses as the USD gained back lost ground on the JPY. Markets paid little attention to the Bank of Japan rate decision, unanimously unchanged as attention remained on the USD/JPY rate. The Hang Seng (+0.46%) continued to extend on the recent 2-day gains, as participants await the outcome of talks between the government and protesters.
FIXED INCOME
Bunds continue to underperform USTs with the German benchmark subject to profit-taking after printing contract-highs earlier in the session. This level was touched following the concerning German industrial production figures (M/M -4.0% vs. Exp. -1.5% (Prev. 1.9%, Rev. 1.6%)) which has triggered further concerns over the possibility of Germany entering into recession with analysts at ING saying that the drop in IP is too strong to explain by one-off factors. Nonetheless, Bunds have since pulled away from these levels after meeting technical resistance amid a lack of notable economic commentary to further drive price action.
EQUITIES
European equities trade in a sea of red alongside the lacklustre German industrial production data which came in at its lowest level since 2009. On a sector specific basis, materials is the only sector in the green across Europe with support provided by reports that Glencore (up as much as 1.5%) is said to be laying the groundwork for potential merger with Rio Tinto (+5%) in 2015 after reaching out to Rio Tinto’s biggest investor (Aluminium Corp. of China) to gauge its interest in a potential deal, according to people familiar with the matter. To the downside, healthcare names are seeing notable outperformance with GSK (-1.7%) trading lower following a negative broker move at Kepler Chevreux. Furthermore, airlines names are also being weighed on this morning following an amalgamation of profit-taking and negative news stories including reports that a Spanish nurse has tested positive for the ebola disease, which could potentially have the scope to hamper travel across Europe.
FX
USD/JPY is one of the notable movers in FX markets with JPY gaining at the expense of USD following comments from Japanese PM Abe who said JPY strength is hurting small Co.’s and households, thus signalling that Japanese authorities believe JPY weakness may have reached its conclusion. This move to the downside for the pair has also been exacerbated by unfavourable interest differential flows alongside the move lower in US yields. Elsewhere, AUD fell 40 pips overnight as the RBA once again highlighted the over-valued currency, however the weakness was quickly erased as the market saw nothing new in the policy statement, with AUD/USD now residing in positive territory. GBP/USD trades relatively flat after failing to sustain the move above the 1.6100 level with the pair relatively unreactive to the in-line UK industrial and manufacturing report
COMMODITIES
Once again both Brent and WTI crude futures trade in negative territory with the move to the downside exacerbated by WTI slipping back USD 90.00bbl ahead of tomorrow’s DoE inventory report which is expected to reveal a build of 2mln bbls. Nonetheless, WTI crude futures still reside above yesterday’s low print of USD 88.76bbl. In the metals complex, spot gold trades above the key USD 1,200 albeit of its highs, with support overnight stemming from the weakness observed in the USD index and short-covering.
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DB’s Jim Reid Concludes the overnight recap
Its been a mixed start to the week for markets with US equities trimming back some of its post-payrolls gains while European equities edged ahead for the second consecutive day. The S&P 500 (-0.16%) paused after a two-day rally although sentiment was also weighed by the weakness in small caps. The Russell 2000 fell -0.91% yesterday to extend further its underperformance this year. Indeed whilst the S&P 500 and the Dow are now around 6.3% and 2.5% ahead for the year the Russell is nearly -6% YTD. In the absence of major data flow the market is perhaps happy to ‘wait-and-see’ before Alcoa kicks off the earnings season on Wednesday. Credit markets broadly moved in lockstep with equities with CDS index rolls being a key focus on the day. Roll markets for the CDX IG S22/23, Main S21/22 and Xover S21/22 closed at around 8bps, 8bps and 100bps, respectively. In the FX space, the USD reversed most of Friday’s gains (DXY -0.88%) even though we are seeing a slight rebound into the Asian session overnight.
With FX on the move and very much in the headlines lately, we’ve seen two interesting research pieces from DB on this subject over the last few days. First over the weekend DB strategist Alan Ruskin published a note entitled, ‚What the world looks like in large USD cycles.? In it he writes how, ‚Since 1973, the big USD up cycles are associated with surprisingly strong equity performance, less surprisingly weak commodity prices; some widening in BAA spreads versus Treasuries; weaker not strong manufacturing ISM, with soft ISM prices; and weaker developing country growth notably in Latam and Asia.? The piece has lots of interesting charts looking at how different assets have performed during the varying USD cycles back to 1973. See here for full report: http://pull.db-gmresearch.com/p/2201-1F56/72725008/DB_FXDaily_2014-10-06…
We also have a short but dramatic piece from DB strategist George Saravelos which attracted a lot of attention yesterday. The report is called “Euroglut: a new phase of global imbalances.” In it George argues that, “both ‘secular stagnation’ and ‘normalization’ are incomplete frameworks for understanding the post-crisis world. Instead, “Euroglut” – the global imbalance created by Europe’s massive current account surplus will be the defining variable for the rest of this decade. Euroglut implies three things: a significantly weaker euro (forecast 0.95 in EUR/USD by end-2017), low long-end yields and exceptionally flat global yield curves, and ongoing inflows into “good” EM assets. In other words, he expects Europe’s huge excess savings combined with aggressive ECB easing to lead to some of the largest capital outflows in the history of financial markets.? It’s an interesting big picture view of the financial world we live in and is well worth a read. Although we can’t help wondering what the response from other countries will be if the Euro drops to 0.95 vs USD. More QE from Japan, the Fed returning to QE? A response from China? Anyway they’re just a few thoughts of ours after a first read of the note.
Turning to the overnight Asian session the tone is, on balance, firmer. The Hang Seng (+0.35%) and the HSCEI (+0.24%) are up for their third consecutive day. Crowds at key protest sites continue to dwindle whilst representatives from HK’s Occupy Central movement have agreed to hold formal discussions with the government. Both sides hope to start formal talks before 12 October. Chinese markets remain shut. The KOSPI is up by a modest 0.2% whilst the Nikkei is just slipping into negative territory now as we go to print. Asian IG credit spreads opened tighter overnight whilst HY benchmarks are also firmer across the board. The Asia iTraxx roll markets are currently being quoted at 22/23bp with flows broadly skewed towards sellers of protection. Broader EM sentiment is also benefiting from the sharp rally in the overall Brazilian risk complex yesterday. The Bovespa rallied 4.7% to post its biggest daily performance in two years. 5yr Brazil CDS narrowed 16bp and the BRLUSD is now about 2% higher from its Friday’s close.
There was limited data flow for markets to digest yesterday. A notable release was perhaps the disappointing factory orders from Germany which declined by a larger than expected 5.7% mom in August. Core orders also fell 2.5% mom to reverse the gains over the previous two months. All of which are not inconsistent with the recent softening trend in German data. Moving on to central bank activities, in a widely expected decision by the market, the RBA overnight left its cash rate unchanged at 2.5% for the 14th month. Ahead of the BoJ meeting conclusions, Bloomberg news noted that a majority of BoJ’s board members think it should drop the two-year timeframe for meeting its inflation target on concerns that investors may view April 2015 as a binding deadline which may fuel talks of more stimulus to meet the target. Back in Europe there’s also reports that the EU is preparing to reject France’s 2015 budget with the country preparing to run a budget deficit that is wider than EU compliance rules (4.3% of GDP vs 3.0%) as government cost cuts would be just 0.2% GDP (short of 0.8% previously agreed) (WSJ). Although we think ECB QE is highly likely in 2015, these stories are likely to lead to heated debate and disagreements on the ECB council.
We’ll get more data flow today with the IBD/TIPP economic optimism (Oct) and JOLTS job openings (August) being the notable ones from the US. Fed’s Dudley and Kocherlakota are also scheduled to speak at some point today. In Europe, Industrial production data from the UK and Germany will probably be the key. We should also get the latest World Economic Outlook from the IMF today.