As the accelerating global currency wars, global money printing and abdication of fiscal policy on behalf of monetary policy becomes a worldwide pandemic, increasingly more markets are now trading like pennystocks, case in the point the world’s second “deepest” stock market, the Nikkei225 has moved nearly 2000 points from high to low in the past two days on no actual news, while last night in particular was a complete embarrassment for anyone who still claims central banks aren’t the only thing that moves markets: from up 3% to down 3% (under 14,000) following some “unexpected” comments from Kuroda, and finally closing up just barely, the entire move was tracing every squiggle in the USDJPY.
Then on to Europe where stock markets are now trading at their lows on the latest incarnation of bizarro day: it turns out the (Read more…) for the red stock market move and the sudden blow out in peripheral yields (, was the better than expected German IFO Business Climate print which came at 105.7, up from 104.4, and better than the expected 104.4. The “positive” surprise, which has moved the EURUSD to nearly 1.30, has turned out to be stock negative as it means the ECB is now less likely to cut rates even more, according to Morgan Stanley first and then all other penguins. As we said yesterday: all good news is now explicitly bad news if only for stocks, and Europe just figured this out. As for the peripheral bonds, we doubt the widening is due to a better German IFO and in all likelihood is driven by fears of what may and will happen once the Japanese carry trade, which has been the sole source of plunging PIIGS yields for the past 6months, finally unwinds: a moment which appears to be getting closer with every passing day.
Perhaps the best summary of the last two days comes from Deutsche’s Jim Reid:
The last 36 hours have perhaps been evidence as to what might happen if stimulus is withdrawn before the global recovery has been cemented and what might happen if Japan makes mistakes along the way to their attempted new dawn. With the Chinese data still ambiguous, Europe still in recession, Japan in the very early stages of a growth experiment and with the US recovery still historically very weak one has to say that liquidity has been the main market fuel in recent months. So central banks have to tread carefully and the Fed tapering talk and the BoJ’s seemingly benign neglect policy towards JGBs has had the market fretting.
Looking ahead at the US which will have a holiday shortened trading session, and where the carbon-based traders will be on their way to the Hamptons around lunchtime, the only data is Durable goods, but most importantly, there is no POMO today.
Here is SocGen’s take on the main FX catalysts:
A much quieter session was observed in Japan overnight after US stocks squeezed off their lows and this should lead us into a fairly orderly session in Europe where the focus this morning will on the German IFOP survey for May. The Nikkei rebounded 0.9% into the close, after falling 3.4% at one point. Though the 14,000 level has been successfully defended, we may not yet have seen the tail end of this week’s wobble. 10y JGB yields dropped 2bp after fluctuating in a 0.83%-0.91% range.
The consensus forecast for the German IFO calls for no change from April at 104.4, but the stronger manufacturing PMI published yesterday (49.0 vs 48.1) is cause for optimism. Conversely, a third successive decline would pour cold water on the upbeat monthly Bundesbank report released earlier in the week and would dampen hopes of an acceleration in Q2 GDP from 0.1% qoq in Q1. A stronger IFO does not make the EUR a buy but, after the rebound in EUR/USD above 1.2900 from the 1.2822 low, a weekly close at the highs would validate a short-term tactical switch for a chance to capitalise on a possible return to 1.3021 (200d ma). Trend line resistance above runs at 1.3135. USD bulls have been in command since mid-February and will have been emboldened by yesterday’s weekly claims data, i.e. a drop in continuing claims to below the 3m mark (2.912m). This is the lowest level since March 2008 when the BLS unemployment rate stood at 5.1%. We are still over 2.5ppts away from that but the downtrend in continuing claims will inevitably get spirits up for the 7 June employment report. That may be too early to tempt the Fed to review its asset purchase programme but the bond market will not stand still. A 7bp rebound off the 1.96% intra-day low in UST 10y yields yesterday shows the bond market has decided not to downplay Bernanke’s midweek comments and an attempt to move past the 3 March highs (2.08%) could be earmarked for next week as $99bn of supply looms (2y/5y/7y). US/EU 10y swaps look set to end the week at or above 50bp for the second week in a row.
Also on the agenda today are US durable goods orders and ECB weekly LTRO repayments. Paybacks in 3y funds have slowed to a trickle in recent weeks. A combined total of EUR1.124bn this week was the lowest combined total since the start of the repayments in February. A stronger IFO could ignite short-term paying interest in Eonias and swaps and add to the curve steepening bias observed yesterday.
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And the remainder of Jim Reid’s overnight recap:
Thursday’s BoJ press briefing saw Kuroda suggesting that gains in yields could be expected as the economy improved. This was after previously saying that the BOJ was aiming to lower interest rates. This confusion accelerated the sell-off which helped lead to the 7.32% fall in the Nikkei on Thursday. This morning we initially saw calmer markets largely thanks to a relatively steady performance in the US session overnight. However after being positive for most of the session the Nikkei is dropping sharply into negative territory as we type this (now -2.5%). 10 year JGBs are more stable at 0.83% but did briefly touch 1% late yesterday. Speaking at a parliamentary session overnight in Tokyo, Japanese PM Shinzo Abe declined to comment on yesterday’s drop in Japanese equities and said he expects the BoJ to have appropriate communications with financial market participants. Shortly after, Kuroda said that the BoJ will continue with its efforts to end deflation and the BoJ will stablise the bond market with “flexible operations”.
Elsewhere in Asia, the Hang Seng (-0.2%), ASX 200 (-1.8%) and KOSPI (-0.1%) are also on a weaker footing in overnight trading. Asian credit markets are fairly quiet given a public holiday in Singapore. I don’t think it’s in honour of my visit earlier this week.
As mentioned above, the US session prior to this saw a recovery from a weak open with the S&P 500 recovering throughout the day to close 0.9% off the opening lows and finishing -0.29%. Considering the overall volatility that preceded it the US market session was remarkably dull. Some of the ‘tapering’ fears were probably eased by comments from San Francisco Fed’s Williams where he told Bloomberg news that the Fed could step up the pace of QE again after tapering and that they won’t go on autopilot. St Louis Fed‘s Bullard said that the Fed was not “that close” to tapering QE, and noted that “even if we do taper it would still be a very aggressive pace of purchases because we would only be moderating by a small amount.” Indeed as we said yesterday we do think QE or derivations thereof will be around for many years to come even if there is a possibility of slowing purchases in the near term.
Better US data perhaps also played its part yesterday in stabilising markets with initial jobless claims (340k v 345k) coming in stronger than estimates while the Markit US PMI Preliminary number (51.9 v 51.2) also topped market consensus. House prices and new home sales data were also better so all up US releases were certainly more encouraging than the Chinese and European prints that we’ve seen over the last 24 hours. Indeed, the Euroarea composite PMI rose by 0.8pts to 47.7, higher than consensus estimates of 47.2, but still firmly in contractionary territory. There was little cheer elsewhere as the French composite PMI was unchanged at 44.3, with manufacturing improving but services unchanged on the month. Germany’s flash composite PMI improved (up 0.8 points to 49.9), driven by both manufacturing (49.0 vs 48.5 expected) and services (49.8 vs 50.0 expected) indices. The Stoxx600 finished 2.1% lower in its first -2% move since July 2012.
Turning to today’s calendar, we look set to have a quieter day ahead of Memorial Day long weekend in the US and a probably wet bank holiday here in the UK on Monday. CME & CBOT interest rate and fx products close early today. In terms of data, the German IFO and US durable goods orders are the main prints.