It has been another session of overnight weakness, in which, to quote Deutsche Bank, “something has changed” as ES algos no longer track every tick of the EURJPY (or other JPY pair variants). Usually in such transition periods where the robots are not sure how to trade risk based on highly leveraged inputs, things go bump in the night, and they did just that with the E-Mini trading just off its overnight lows, despite a notable rise in the EURJPY from yesterday’s close. Keep a close eye on the now traditional pre-market ramp in the EURJPY – if unaccompanied by an increase in the E-mini, it may be time to quietly exit stage left.
This morning the taper theme is weighing on Asian EM assets including a number of EMFX crosses such as USDINR (+0. (Read more…)67%) and USDMYR (+0.4%). Despite this, the EUR continues its strong run against the USD and is poised for its eighth consecutive gain. The AUDUSD spiked up shortly after the release of a stronger than expected Australian employment report (+21k vs +10k expected) but the gains were quickly reversed on the combination of the overnight USD strength and resetting of shorts. Asian equities are trading broadly lower with laggards being the Nikkei (-1.3%) and Jakarta Composite (- 1.2%). It’s been a heavy trading session for Asian credit and sovereign bonds which is unsurprising given the weak tone in EM fixed income yesterday.
Stocks traded lower throughout the session, with consumer goods underperforming its peers and Peugeot shares trading lower by 10% in reaction to reports citing sources that the board has approved in principal EUR 3.5bln capital increase with Dongfeng and French government. Initial selling pressure on Bunds which largely stemmed from market participants reacting to reports citing ECB’s Praet who signalled that the ECB will try to force Eurozone banks to hold capital against sovereign bonds gradually ebbed and better buying by Asian, as well as European based real money accounts saw Bunds move into positive territory.
Looking at the rest of the US session, today we get the release of the weekly jobless data from the US and US retail sales.
Overnight bulletin summary from Bloomberg and RanSquawk
- Stocks traded lower throughout the session following the negative sentiment from the US and Asia asFed taper concerns continue to linger.
- ECB’s Praet signalled the ECB will try to force Eurozone banks to hold capital against sovereign bonds, in an attempt to stop weak lenders using its cash to hoover up the debts of crisis-hit countries.
- Looking ahead for the session, today sees the release of the US weekly jobless data, retail sales as well as a 30y bond auction from the US.
- Treasuries 7Y and longer gain before week’s debt auctions conclude with $13b 30Y bonds; yield 3.87% in WI trading after drawing 3.81% in November.
- Yesterday’s $21b 10Y sale awarded at 2.824%, about 0.7bp above 1pm WI yield, first 10Y reopening to tail since July, biggest tail since Jan.; directs lowest since Aug. 2012
- A U.S. budget accord is on track to win passage in Congress largely because its most important accomplishment is pushing off automatic spending cuts that neither party likes
- New Zealand’s central bank stepped up its inflation-fighting rhetoric and signaled it will start raising rates in the first half of next year as the economy strengthens
- The ECB will seek to combine its new powers as principal banking regulator with current role as currency issuer to strengthen requirements on sovereign bonds, which have traditionally been classed as risk free, ECB’s Peter Praet said in an interview with the FT
- Japan’s Government Pension Investment Fund should decrease its allocation to JGBs and increase investments in other assets, Takatoshi Ito, chairman of a group advising lawmakers on pension allocations, said to a LDP committee today
- Stanley Fischer, said to be the leading candidate for the No. 2 job at the Fed, offers crisis-fighting experience and a dose of skepticism about efforts to shape expectations on the outlook for interest rates
- The U.S. said it’s considering sanctions against Ukraine after riot police tried to clear thousands of anti-government activists off the streets of Kiev
- Sovereign yields higher. EU peripheral spreads widen. Asian and European stocks, U.S. equity index futures fall. WTI crude gains, gold and copper fall
US event calendar
- 8:30am: Retail Sales Advance, Nov., est. 0.6% (prior 0.4%)
- Retail Sales Ex-Autos, Nov., est. 0.2% (prior 0.2%)
- Retail Sales Ex-Autos and Gasoline, Nov., est. 0.3% (prior 0.3%)
- 8:30am: Initial Jobless Claims, Dec. 7, est. 320k (prior 298k)
- Continuing Claims, Nov. 29, est. 2.757m (prior 2.744m)
- 8:30am: Import Price Index m/m, Nov., est. -0.7% (prior -0.7%)
- Import Price Index y/y, Nov., est. -1.7% (prior -2%)
- 9:45am: Bloomberg Consumer Comfort, Dec. 8 (prior -31.3)
- 10:00am: Business Inventories, Oct., est. 0.3% (prior 0.6%) Central Banks
- 3:00am: Draghi speaks in EU Parliament debate Supply
- 11:00am: Fed to purchase $3b-$4b in 2019-2020 sector
- 1:00pm: U.S. to sell $13b in 30Y bonds in reopening
Market Re-Cap from RanSquawk
Stocks traded lower throughout the session, with consumer goods underperforming its peers and Peugeot shares trading lower by 10% in reaction to reports citing sources that the board has approved in principal EUR 3.5bln capital increase with Dongfeng and French government. Initial selling pressure on Bunds which largely stemmed from market participants reacting to reports citing ECB’s Praet who signalled that the ECB will try to force Eurozone banks to hold capital against sovereign bonds gradually ebbed and better buying by Asian, as well as European based real money accounts saw Bunds move into positive territory. Furthermore, in spite of the upticks seen in the Euribor fix which came in at 0.227% vs. yesterday’s previous fix of 0.267%, together with the fact that the EONIA fix rose to 0.144 from 0.131 the day before, the Euribor curve reversed much of that price action in reaction to the release of the latest ECB daily liquidity update which showed that excess liquidity in the system has increased. Elsewhere, Gilts have underperformed their EU counterparts, with prices weighed on by the supply and also reaction to the BCC increasing its UK 2013 GDP forecast to 1.4% vs. 1.3% and also raising its 2014 GDP forecast to 2.7% vs. 2.2%. Looking ahead for the session, today sees the release of the weekly jobless data from the US and US retail sales.
Head of the GPIF reform panel Takatoshi Ito said the GPIF needs to decrease JGBs, increase other assets and should buy inflation linked bonds.
According to BofAML forecasts, the BoJ are to ease in February, buy more ETFs and boost average maturity of bonds it buys.
Japan Cabinet has approved JPY 5.46trln extra budget for 2013/2014 to fund economic stimulus, no need to sell additional new bonds. Japan Finance Minister Aso plans to approve FY14 budget at December 24th cabinet meeting.
EU & UK Headlines
SNB 3-Month Libor Target Rate (Dec-12) Q/Q unchanged at 0.00-0.25%, as expected; maintains EUR/CHF floor at 1.2000
The SNB expects economy to expand 1.5% to 2% in 2013, does not see inflation approaching 2% price stability threshold for entire forecast horizon. The SNB also sees 2013 CPI at -0.2% vs. Prev. -0.2%. and are prepared to take further steps if necessary, with the value of CHF still high.
ECB’s Praet signalled the ECB will try to force Eurozone banks to hold capital against sovereign bonds, in an attempt to stop weak lenders using its cash to hoover up the debts of crisis-hit countries.
Bondholders and large depositors in a failing European Bank face taking losses from the start of 2016, EU negotiators agreed on Wednesday, in a provisional deal on rules to spare taxpayers from further bailouts.
ECB’s Liikanen said capacity of monetary policy has not been exhausted and ECB are ‘ready and able to act’, whilst ECB’s Hansson said negative deposit rate probably option for ECB in more adverse cases with Deutsche Bank economist says an ECB negative deposit rates would be ‘extortion’.
Eurozone Industrial Production SA (Oct) M/M -1.1% vs Exp. 0.3% (Prev. -0.5%, Rev. -0.2%)
- Eurozone Industrial Production WDA (Oct) Y/Y 0.2% vs Exp. 1.1% (Prev. 1.1%, Rev. 0.2%)
This marked the biggest month on month contraction in output since Sept 2012 with declines across goods were broad based in the Euro Area, with energy appearing to lead the contraction.
Italy Premier Letta’s government wins confidence vote in the Senate as expected.
French CPI (Nov) M/M 0.0% vs Exp. 0.0% (Prev. -0.1%)
- French CPI (Nov) Y/Y 0.7% vs Exp. 0.7% (Prev. 0.6%).
The British Chambers of Commerce said that UK Business Sentiment is to fall 5.3% in 2013 and rise 5.7% in 2014. The BCC also increased its UK 2013 GDP forecast to 1.4% vs. 1.3%, raised its 2014 GDP forecast to 2.7% vs. 2.2%.
Goldman Sachs on Former Bank of Israel’s Fischer (the front-runner for the Fed Vice-Chair position) says that with respect to monetary policy at the zero lower bound, he has generally spoken favorably about quantitative easing but has expressed more skepticism about forward guidance. Nonetheless, we think forward guidance will continue to be a key item in the Fed’s toolkit.
Stocks traded lower throughout the session following the negative sentiment from the US and Asia after Fed taper concerns continue to linger. In terms of sector specific news, consumer goods are underperforming its peers and Peugeot shares trading lower by 10% in reaction to reports citing sources that the board has approved in principal EUR 3.5bln capital increase with Dongfeng and French government. The underperforming stock this morning in European trade has been Wood Group, following their pre-market release, whilst Ziggo shares are seen up with gains of around 7% following reports that Liberty Global are said to prepare renewed takeover bid for the Co.
Market talk of real names selling EUR/GBP has seen weakness across the board in EUR and strength in GBP as volumes continue to remain light. Furthermore, JPY weakness is being observed despite a lower close in Asia as there is talk of hedge fund buying in EUR/JPY. Furthermore, EUR/CHF proved to be relatively unreactive to the decision by the SNB in early trade as it fell in line with expectations. Whilst overnight despite AUD seeing brief strength after Employment Change for November exceeded expecations, the gains in were quickly pared due to a revision lower to the previous reading.
The lower than expected Swedish inflation and higher than expected unemployment has prompted Nordea and Handelsbanken to revise their interest rate expectations to a cut on December 17th.
The RBI said it will infuse an additional INR 10,000 crore into the system on Friday to ease the tight liquidity situation, ahead of commencement of advance tax payments.
China November copper output 654,000 tons and lead production 386,000 tons. according to Statistics Bureau data.
China are to raise fuel prices, raise gasoline price by CNY 60/ton, raise diesel price by CNY 60/ton and raise fuel prices by tomorrow, according to Chem99.com.
DB’s Jim Reid concludes the overnight recap
The taper continues to dominate trading and thoughts at the moment. Indeed with less than two weeks to go until Xmas markets are on edge ahead of next week’s ‘in-the-balance’ FOMC meeting. As we discussed yesterday, news of a possible imminent US budget deal must surely increase the probability of a taper even if they are still below 50%. As such the deal creates a source of market volatility even if it should in theory be a welcome development. The S&P 500 fell 1.13% in its worst day in more than a month and equities finished the day at the lows. Taper nervousness was evident in EM currencies particularly MXN (-1.3%) and BRL (- 1.5%) which underperformed against the USD. The UST curve steepened while 10yr yields added 5bp to take it back above 2.85%. So after a brief bounce following Friday’s payrolls, we’ve now had two days of consolidation which have taken equities and 10yr yields back to their pre-payrolls levels.
In the second half of the US trading session, Israeli television reported that former Bank of Israel governor Stanley Fischer is the leading candidate for the job of Fed Vice Chair. The potential appointment of Fischer is reportedly backed by Obama and Yellen. The reports did not cite a source but were quick to point out that Fischer has previously criticised forward rate guidance. This probably exacerbated the selloff that we saw late yesterday. Most commentators pointed to a September article from the WSJ where Fischer was quoted as saying that “If you give too much forward guidance you do take away flexibility” and that “It’s a mistake to try and get too precise”. Apparently Fischer had tried providing signals to the market on becoming governor in 2005, but gave up after he realised it restricted the bank’s future actions. The WSJ also noted that Fischer had previously described QE as “dangerous” but “necessary”. Others had more dovish observations about Fischer, noting that as Bank of Israel governor he employed a Fed-style dual focus on employment and growth alongside price stability, whereas previous governors placed an emphasis on inflation.
Either way, the focus on Fischer’s criticism of forward guidance comes at a particularly awkward time given that Fed tapering may be just around the corner and indeed many are expecting the Fed to strengthen its forward guidance as a means of softening its impact. Some also fear that Fischer may act as an intellectual counterweight to a dovish Yellen given that he also comes with strong academic credentials. It was widely noted that Fischer was a professor of economics at MIT where he oversaw Bernanke’s and was also a teacher to Mario Draghi.
So with about a week now until we get to the final FOMC for the year, it wasn’t surprising that we began to see market chatter on what course the Fed may take at its next meeting. There was renewed talk of the Fed weighing up cutting interest on excess reserves (Bloomberg) as a means of strengthening its commitment to low rates, and to divert attention away from any imminent slowdown in asset purchases. There were also re-runs of previous discussion that the Fed is testing a reverse-repo facility to give it better control of shortterm rates when it eventually needs to hike.
Coming back to the US budget, markets gained little comfort from the building bipartisan support for the Senate Budget Committee’s deal announced on Tuesday night. Indeed markets seemed to be more concerned that the lessened fiscal drag and possible bump to US growth next year will only serve to bring forward or accelerate the Fed taper. DB’s Joe Lavorgna wrote that the deal does not include an extension of federal unemployment benefits, and the failure to extend these benefits could have a meaningful impact on the unemployment rate. Joe notes that when federal benefits expire at the end of this month, perhaps a quarter of them will drop out of the official labour force. This would have the effect of lowering the unemployment rate by 0.3%, placing it only just above the Fed’s 6.5% rate hike threshold.
This morning the taper theme is weighing on Asian EM assets including a number of EMFX crosses such as USDINR (+0.67%) and USDMYR (+0.4%). Despite this, the EUR continues its strong run against the USD and is poised for its eighth consecutive gain. The AUDUSD spiked up shortly after the release of a stronger than expected Australian employment report (+21k vs +10k expected) but the gains were quickly reversed on the combination of the overnight USD strength and resetting of shorts. Asian equities are trading broadly lower with laggards being the Nikkei (-1.3%) and Jakarta Composite (- 1.2%). It’s been a heavy trading session for Asian credit and sovereign bonds which is unsurprising given the weak tone in EM fixed income yesterday.
In other headlines, the FT is suggesting that the ECB may force Eurozone banks to hold capital against sovereign bonds. In an FT interview, ECB Executive Board member Peter Praet indicated that the ECB, using its powers as banking regulator, could change the risk-free classification on sovereign bonds and could try and implement these changes alongside the AQR of European banks. Praet also suggested that this was part of the ECB’s reluctance to have ECB liquidity used to fund purchases of sovereign bonds, something which Draghi also mentioned in his last press conference. Elsewhere in Italy, PM Letta easily passed a confidence vote, as was widely expected.
Turning to the day ahead, the main focus will be on US retail sales where consensus estimates are centred around a headline gain of 0.6%. French/Italian CPI, Eurozone industrial production and initial jobless claims are the other data releases of note. The US House of Reps may vote on the US budget as early as today.