Following yesterday’s most recent Europe-led rout, the market is attempting a modest rebound, driven by the usual carry funding currency pair (EURUSD and USDJPY) levitation, although so far succeeding only modestly with not nearly enough overnight ramp to offset the bulk of yesterday’s losses. In a centrally-planned, currency war-waging world, it is sad that only two key FX pairs matter in setting risk levels. But it is beyond hypocritical and highly ironic that according to a draft, the G-20 will affirm a commitment to “avoid weakening their currencies to gain an advantage for their exports.” So the G-20 issues a statement saying nobody is doing it, when everyone is, thus making it ok to cheapen your exports into “competitiveness”? In other words, if everyone lies, nobody lies. (Read more…) Of course, also when everyone eases, nobody eases, and the world is back to square one. But that will only become clear eventually.

Nikkei’s drop of 1.22% overnight, a market which has become as bad as penny stocks in its daily volatility, driven by a rise in the USDJPY has not helped (especially in the aftermath of the record foreign capital surge into Japanese stocks), and the modest 0.17% rise in the Shanghai Composite is actually far better than expected considering China reported new home prices rising in 68 out of 70 cities in March (compared to “only” 66 in February), meaning the country will continue to focus on eliminating hot, speculative money from its economy.

In Europe, Germany officially approved the Cyprus “bailout”, and the associated plunder of its gold. Now the decision is back in the hands of the Cypriot parliament. In Italy, the Bersani and Berlusconi parties are said to be close to backing Senate speaker Franco Marini as a presidential candidate but we will believe a compromise when we see it.  More importantly, the Italian financial police, after allegedly confiscating €1.8 billion worth of Nomura assets several days ago, has now searched through the offices of JPM in Milan in its ongoing Monte Paschi probe. In Spain, the country sold €4.71 billion in 2016 and 2023 bonds, more than the target, with local banks (who reported an amusing drop in the bad loan ratio from 10.78% to 10.39% – must be all those loans handed over to the bad banks) and the pension funds, as well as Japanese banks, likely buying. Ironically hours prior, Bloomberg’s economist David Powell said the Spanish sovereign debt is close to unsustainable.

Also speaking of Europe, Citi’s Jurgen Michels said it is likely that the ECB will lower rates in May and again later this year, with euro area in recession and poor funding conditions in periphery countries. He added that he expects generalized dollar strength in the coming months.

Back in the US earnings season so far is off to a rather miserable start: today we will get Morgan Stanley, IBM, Microsoft and Google. Initial jobless claims will be closely watched as they cover the survey period for April’s payrolls. We also have the Philly Fed survey, where the market is looking for an improvement to 3.0 (vs 2.0 previous month).

A quick recap of European markets, which have so far proven less prone to flash crashing than yesterday:

MARKETS

• Spanish 10Y yield down 6bps to 4.62%
• Italian 10Y yield down 5bps to 4.2%
• U.K. 10Y yield up 2bps to 1.7%
• German 10Y yield up 2bps to 1.25%
• Bund future down 0.13% to 146.05
• BTP future up 0.37% to 113.12
• EUR/USD up 0.24% to $1.3063
• Dollar Index down 0.2% to 82.52
• Sterling spot up 0.02% to $1.5241
• 1Y euro cross currency basis swap up 1bp to -21bps
• Stoxx 600 up 0.61% to 285.47

SocGen provides the key macro catalysts for the day:

Risk appetite has considerably diminished this week as volatility has returned to two-month highs and the correction in commodities is causing ripples across fx, equities and rates: mixed US and Chinese indicators triggering a downward revision to inflation expectations and ongoing ultra-accommodative monetary policies within the G10 make it difficult for investors to get a handle on the medium-term outlook. With gold and the yen visibly having lost their safe haven status, where can investors turn? Bond markets appear to be the asset of choice at the moment, with the ECB’s Weidmann yesterday in uncharacteristic fashion beating the ‘easy policy’ drum: since the beginning of the week, Portugal, Sweden, the Netherlands, Spain and Italy bond markets have outperformed in Europe. Treasuries and Gilts are also in demand. So much for fears of a bond bubble.

Right now, investors are still hunting for yield by moving further down the curve and picking up lower credit quality, supported by the flood of liquidity and the stimulative central bank policies in the West. However, it is still difficult to determine whether bullish trends in most asset classes will prove sustainable as signs of a macro slowdown emerge. In particular, we note that European stress has not disappeared, even though the ECB’s OMT is still suppressing underlying budget and credit anxieties as discussions over banking supervision are ongoing. Italy will welcome a new president mid-May as the selection process gets underway today. However, the country still has no government, though optimists would argue that day-to-day affairs are run by PM Monti and government funding has proceeded without difficulty.

The G20 may address some of these topics this weekend, not to mention the threat of competitive devaluation in Japan (a source of friction at the G7 in Moscow earlier this year). Against this backdrop, short-term investment strategies will have to factor in uncertainty and remain prudent: this continues to be a favourable backdrop for global bonds, US and Japanese equities in particular, and positive overall for the dollar.

* * *

And a full summary of the past 24 hours from DB’s Jim Reid

Markets were also fairly depressed yesterday and it continues to be a year where risk perhaps feels healthier than all the actual hard numbers suggest. With yesterday’s sell-off, where the DAX and CAC were down -2.34%, and -2.35% respectively, these two markets are now in negative price territory YTD. Indeed within the G20, although the Nikkei (+28% YTD), the S&P 500 (+8.8%), the ASX200 (+7.2%) and the FTSE (+5.9%) are among the stand-out performers, only 9 of the bourses in the G20 countries are higher for 2013 (all in local currency terms). There also is a sizeable dispersion within the EM side of the G20 as evidenced by the strong performance of Indonesia’s Jakarta Composite (+16%) and Mexico’s IPC (+20%) against the YTD losses for Brazil’s BOVESPA (-13%).

Commodities are also lower across the board, while fixed income and credit remain strong relative performers. Overall it does seem to be turning into a year of weaker correlations between asset classes.

Back to yesterday, Germany’s DAX set the tone early on with chatter that the country’s credit ratings could be downgraded. Investors feared a downgrade from S&P and Moodys but it was the lesser-known Egan-Jones who eventually came out with the downgrade towards the end of the US session (from A+ to A). The news had little effect on US equities which were well and truly trading in the red at the time. Even a relatively upbeat Fed Beige Book failed to buoy the S&P500 which closed near the lows of -1.43% as technology stocks led the declines.

Amongst the notable moves, Apple dropped 5.5% after one of its audio chip suppliers, Cirrus Logic, reported an inventory glut that investors interpreted as suggesting a shortfall in iPhone sales. In other asset classes, credit again showed some resistance to the rest of the market with the CDX IG and European iTraxx indices trading unchanged for much of the day before closing a touch weaker. 10yr UST yields firmed a 1bp to 1.68% while core bond yields elsewhere rallied around 3-4bp. In the commodities space, gold (+0.67%) traded firmer while Brent (-2.75%) fell for the sixth straight day. Copper was also down 4%.

Earnings were on the disappointing side yesterday, with nine out of 14 S&P500 companies missing revenue expectations and one-third missing EPS expectations. Amongst the highlights was Bank of America who missed earnings estimates after recording a 20% yoy drop in FICC trading revenues which DB’s equity analysts point out is softer than peers which have seen revenue declines of 5-10%.

Turning to the overnight news, the G20 is expected affirm its commitment to avoid competitive currency devaluations in a draft communiqué being prepared for this week’s IMF/G20 meetings (Bloomberg). The USDJPY initially traded lower following the headline, but it has since rallied back up towards 98.2 to be unchanged on the day, probably because the language essentially maintains the G20’s pledge made in February to “.move towards more market-determined exchange rates”. Staying in Japan, local newswires are reporting that the BoJ will raise its forecasts for consumer price growth and may say it expects to achieve 2% inflation as early as spring 2015 at its policy board meeting on April 26th (Nikkei).

Elsewhere in Asia, equities are trading lower taking the lead from yesterday’s risk sentiment in the US and Europe, although most Asian bourses are off the early lows. Losses are being paced by the Hang Seng (-0.1%), Nikkei (-0.3%) and KOSPI (-0.7%). The AUD is unchanged against the greenback at around 1.03 while most commodities continue to edge lower overnight. In China, the focus is on the latest property price data which showed that prices in 70 cities rose 1.5% month-onmonth in March, including sharp gains in some major cities. There is talk of distortion in the data as a number of property buyers purchased in March ahead of new government austerity measures which were implemented at the start of April Later today, the Italian parliament will convene to elect a successor to President Napolitano. Yesterday, the center-left’s Bersani proposed former Senate speaker Franco Marini as candidate for Italy’s president. Marini, a former unionist, also got the support of the caretaker PM Mario Monti and center-right leader Berlusconi.

Nevertheless, Marini’s election still has an element of uncertainty. Marini faces opposition from within Bersani’s own coalition, with Bersani’s main party rival, Matteo Renzi, immediately saying he would not back the candidacy. Renzi described Marini as “a candidate from the last century” (Reuters).

Moving on to the day ahead, Morgan Stanley, IBM, Microsoft and Google will highlight a busy day on the earnings calendar. Initial jobless claims will be closely watched as they cover the survey period for April’s payrolls. We also have the Philly Fed survey, where the market is looking for an improvement to 3.0 (vs 2.0 previous month).