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Futures Slide As Global Equity Rally Fizzles Hit By Soaring Yen

Courtesy of ZeroHedge. View original post here.

Is the dead cat bounce over?

European shares rolled over this morning after a late downswing in Asia as markets struggled to find stability despite Monday’s frenzied rally, with futures this morning a bit of a mess.

“I think what we are seeing is a little bit of a consolidation,” said DZ Bank strategist Christian Lenk. “Given the pace of the move so far, we had to take a break somewhere and we have reached that region now.”

While there has been no specific driver, USD weakness for the third day in a row, and a consequent selloff in USD/JPY – which tumbled shortly before midnight ET – was the main focus in European session.

The resultant surge in the yen, which climbed to the highest since November 2016 pushing the USDJPY as low as 107.40, slammed the Nikkei after the midday break in Asia, with Trump comments on reciprocal tax yesterday also potentially having an influence on USD. Whatever the reason, Japanese stocks pared morning gains with Topix erasing 1.1% advance to trade 0.9% lower on the day. And with the USDJPY nearing the 2017 low of 107.32, Nikkei futures sold off further after the cash close.

At the same time, the EUR/USD lifted to 1.2350 mainly due to move in USD, while the British pound was briefly jolted to a session high of $1.3924 after headline annual UK inflation came in at 3.0%, a tenth of a point above forecasts and holding close to its highest level in nearly six years. In South Africa, the ZAR dipped briefly after President Zuma was said to refuse ANC’s resignation call.

Pressured by the weaker dollar and sliding European stocks, S&P 500 futures pointed to a drop for U.S. stocks at the market open after two days of gains.

The 10-year Treasury yield fell back to 2.83% after touching 2.902% on Monday. The general risk-off lifted core fixed income, U.S 2s10s flatten away from 200DMA after testing level for third day.

German bonds were also back in demand as recent multi-year highs on yields on both sides of the Atlantic proved attractive for some investors. Germany’s 10-year yield fell by almost 2 basis points to 0.73 as it retreated further from the 2-1/2 year high of 0.81 percent hit last week.

Hedge funds and other large speculators have boosted bets on Treasury futures to a record, indicating they expect the 2018 bond-market rout will resume in the days ahead. An investor at Goldman Sachs Asset Management warned Treasury 10-year yields could rise to as high as 3.5% in the next six months as the market prices in a steeper pace of Federal Reserve tightening.

All eyes will be on tomorrow’s CPI report. “The (U.S.) consumer prices numbers (on Wednesday) bear close watching as if it shows a strong rise, that could rattle U.S. long-term yields,” and currencies and stocks said Koji Fukaya, president of FPG Securities in Tokyo.

Meanwhile, in global stocks, a jump in global equities yesterday wasn’t enough to put traders’ minds at ease that the volatility that wiped $2 trillion from U.S. stocks last week has come to an end. Consumer-price data due Wednesday could give some clues on direction, given that pressure on equities has been emanating from the outlook for inflation.

European equities opened on the back foot (Eurostoxx 50 -0.3%) compared to the positive trading session in Asia (ex-Japan), with virtually all bourses in the red. Materials stand out as an outperforming sector amid the US infrastructure plans released yesterday whilst metals are extending gains. Telecoms underperform with BT (-1.2%) at the bottom of the FTSE 100 awaiting news from the Premier League TV rights.

While European equities declined and the Swiss franc gained alongside Treasuries and core euro-area bonds, there has been no clear shift toward haven demand as the kiwi rallied and EMFX rose a third day. European equity markets grind lower, while peripheral equity markets and export stocks underperformed.

Commodities found support from the weaker dollar, with metals higher, and bullion set for back-to-back gains.  Copper prices on the London Metal Exchange extended an overnight rally to trade 1.4% higher at $6,927.00 per tonne. A report from the EIA yesterday noted that shale production for crude is to rise by 100k bbls in March, while another report this morning from the IEA expects US supply to grow more than demand in 2018, with US seen topping Russian production at year-end; as such both WTI and Brent have been pressured throughout the morning with the former briefly slipping below $59bbl. In metals markets, gold prices are near one-week highs amid the softer USD which has dictated a bulk of the price action for precious metals. Elsewhere, China have voiced concerns over US protectionism over steel, whilst aluminium prices have been pressured by building stockpiles. IEA have upgraded their forecast for global oil demand growth to 1.4mln bpd in 2018 from 1.3mln, however they say Non-OPEC supply, led by US, which is likely to grow more than demand in 2018.

On today’s calendar, U.S. sells 4-week bills; small business optimism index, which rose from 104.90 to 106.90, but below the 108.50 consensus. Starting Feb 15, Lunar new year celebrations for the Year of the Dog begin, affecting China, Hong Kong, Taiwan, Singapore, Malaysia and Indonesia. Chinese mainland markets are closed Feb. 15-21. India is out Tuesday for a public holiday.

Bulletin headline summary from Ransquawk

  • European equities lower across the board after a mixed session overnight which saw the Nikkei 225 (-0.7%)
  • hampered by the firmer JPY
  • In FX markets, USD softer against its peers. GBP firmer as UK inflation exceeds expectations (3.0% Y/Y vs. Exp.
  • 2.9%)
  • Looking ahead, highlights include APIs, Japanese GDP and Fed’s Mester

Market Snapshot

  • S&P 500 futures down 0.6% to 2,638.25
  • MXAP up 0.6% to 172.27
  • MXAPJ up 0.9% to 563.36
  • Nikkei down 0.7% to 21,244.68
  • Topix down 0.9% to 1,716.78
  • Hang Seng Index up 1.3% to 29,839.53
  • Shanghai Composite up 1% to 3,184.96
  • Sensex up 0.9% to 34,300.47
  • Australia S&P/ASX 200 up 0.6% to 5,855.90
  • Kospi up 0.4% to 2,395.19
  • Brent Futures down 0.4% to $62.35/bbl
  • Gold spot up 0.5% to $1,328.85
  • U.S. Dollar Index down 0.4% to 89.84

Top Overnight News

  • The People’s Bank of China appointed JPMorgan Chase Bank N.A. as a yuan clearing bank in the U.S., the first non-Chinese lender for such a role globally and a further step to promote international use of the currency
  • A whistle-blower told U.S. regulators that a scheme to manipulate the VIX, the volatility gauge thrust into the spotlight last week during a wild trading session, costs investors hundreds of millions of dollars a month
  • OPEC and its allies have almost achieved their goal of clearing an oil glut, but their efforts could be derailed by rising supplies from the U.S. and other rivals, the International Energy Agency said
  • South Africans awoke to find their nation in limbo after President Jacob Zuma’s refusal to obey his ruling African National Congress’s request to resign voluntarily prompted its top leadership to order his removal from office
  • Cleveland Fed President Loretta Mester (voter) speaks; she holds a hawkish approach, looks for three hikes this year

In Asia, stocks traded mostly higher as the region cheered the continued rebound in the US, where all majors finished with firm gains and the S&P 500 posted its best 2-day performance in over 2 years. ASX 200 (+0.6%) and Nikkei 225 (-0.7%) both opened higher in which mining-related sectors led in Australia, while Japanese stocks were initially outperformed buoyed as participants played catch up on return from holiday, although a firmer currency later saw gains wiped out. Elsewhere, Shanghai Comp. (+1%) and Hang Seng (+1.3%) were jubilant heading closer to the Lunar New Year holidays and after the PBoC announced to lend CNY 393bln through the 1yr Medium-term Lending Facility. Furthermore, there was a decline in money market rates in which the 1-week CNH HIBOR fell by the most so far in 2018, and the latest Chinese lending data also showed both New Yuan Loans and Aggregate Financing surged from prior. Finally, 10yr JGBs were flat amid similar range-bound trade overnight in T-notes and although the BoJ were present in the market under its bond-buying program, this was kept at a reserved amount. Japanese PM Abe said he is undecided on the next BoJ Governor, while Abe also stated that it is up to the BoJ to decide specific monetary policy measures and that he expects the BoJ to continue taking bold measures to achieve price stability.

Top Asian News

  • China Is Said to Plan Blocks on Take-Two’s Grand Theft Auto

European equities this morning opened on the back foot (Eurostoxx 50 -0.3%) compared to the positive trading session in Asia (ex-Japan) and the US. Materials stand out as an outperforming sector amid the US infrastructure plans released yesterday whilst metals are extending gains: Gold (+0.4%), Silver (+0.1%), Copper (+0.8%). Telecoms underperform with BT (-1.2%) at the bottom of the FTSE 100 awaiting news from the Premier League TV rights.

Top European News

  • Greece Launches Tender for 5% Hellenic Telecom Stake Sale
  • BHP Expects $1.8b Income Tax Expense Due to U.S. Reforms
  • U.K. Inflation Holds Steady After BOE Warns of More Rate Hikes

In currencies, Yen strength is the main overnight and early European theme, as Usd/Jpy breached last Friday’s 108.05 low to the downside before overcoming barrier and psychological support at 108.00 on its way to fresh 5 month lows around 107.55. Bids reportedly in the 107.70 area were also filled in pretty short order as risk aversion ratcheted higher, but it remains unclear whether heightened demand for the Jpy (and Chf to a lesser degree) was prompted by the Nikkei’s failure to maintain catch-up gains after Japan’s long holiday weekend or vice-versa. 107.50-45 next in sight for Usd/Jpy, with buying interest not really seen until the low 107.30 area (including last year’s 107.32 low), while cross demand is also rife as Gbp/Jpy falls below the 150.00 handle. GBP firmer after higher than expected inflation figures (3.0 vs. Exp. 2.9% Y/Y), however the rise had been short-lived, given that the headline figure had been in line with the BoE’s forecast. Nzd another noted beneficiary of US Dollar weakness as the Index loses grip of 90.000 again, with the Kiwi reclaiming 0.7300 status and in part also gaining some impetus from Aud underperformance amidst mixed sentiment readings overnight and RBA rhetoric – Aud/Usd above 0.7850, but Aud/Nzd back under 1.0800. Other  Usd/G10 major pairings more contained, albeit still showing a generally softer Greenback, with Eur/Usd regaining 1.2300, Cable around 1.3850 eyeing UK inflation data and Usd/Cad sub-1.2600. Elsewhere, Usd/Zar still in focus and testing recent lows (currently circa 11.9000) ahead of an ANC briefing at 12GMT, with President Zuma still resisting efforts to remove him from office

In commodities, the theme continues for the oil markets, more supply is set to come from US shale producers. A report from the EIA yesterday noted that shale production for crude is to rise by 100k bbls in March, while another report this morning from the IEA expects US supply to grow more than demand in 2018, with US seen topping Russian production at year-end; as such both WTI and Brent have been pressured throughout the morning with the former briefly slipping below USD 59.00bbl. In metals markets, gold prices are near one-week highs amid the softer USD which has dictated a bulk of the price action for precious metals. Elsewhere, China have voiced concerns over US protectionism over steel, whilst aluminium prices have been pressured by building stockpiles. IEA have upgraded their forecast for global oil demand growth to 1.4mln bpd in 2018 from 1.3mln, however they say Non-OPEC supply, led by US, which is likely to grow more than demand in 2018. Iraq oil minister states that there is no current discussion over exiting supply cut agreement Russian Energy Minister Novak stated that OPEC and Non-OPEC allies need to act very cautiously and avoid knee-jerk reactions in respect of new decisions

Looking ahead, the January CPI/PPI/RPI report in the UK is the main focus. In the US, the January NFIB small business optimism print will be released. Away from data, the Fed’s Mester is due to speak in the afternoon on monetary policy and the economic outlook. Pepsico will release earnings.

US Event Calendar

  • 6am: NFIB Small Business Optimism, est. 105.3, prior 104.9
  • 8am: Fed’s Mester to Discuss Monetary Policy and Economic Outlook

DB’s Jim Reid concludes the overnight wrap

Welcome to US CPI eve. All has seemed a bit quiet over the last 24 hours which probably partly reflects half-term (the rush hour trains were lovely and quiet yesterday), partly that the peak position squaring from last week’s vol  spike has seemingly passed for now and also that markets are building up to tomorrow’s big US number. Maybe traders and investors were also buying Valentine’s Day cards and presents as well. I’ll be making my annual trip to Hotel Chocolat later today to buy overpriced chocolates in a nice (but far too big for the amount of produce inside them) package. Given my wife is full time feeding for her plus two ravenous boys, her chocolate intake at the moment is something to admire.

Ahead of tomorrow’s number we have an interesting CPI dress rehearsal today in the UK. This has been made more interesting by the hawkish BoE meeting last week and also two hawkish BoE speakers yesterday. Vlieghe suggested that 3 BoE hikes still leaves some excess demand and wouldn’t get inflation fully back to target. McCafferty said that rates will have to go up slightly earlier and fractionally more than the bank previously expected.

For today, markets are expecting a CPI print of -0.6% mom and 2.9% yoy (2.6% yoy for core) and a PPI reading of 3.0% yoy.

Before that, global equities continue to rebound. US bourses were all higher for the second consecutive day (S&P +1.39%; Dow +1.70%; Nasdaq +1.56%), with all sectors in the S&P up and gains led by the materials, tech and energy stocks. The VIX also traded 11.9% lower to 25.61. Since the beat on US wage growth, the S&P is now down 5.9% overall, but is up 4.9% from the intra-day lows. Similarly the VIX has jumped 90% since 1 February, but is 49% lower than the intra-day highs of 50.30 over the past seven trading days. Key European markets also advanced yesterday, with the Stoxx 600 (+1.17%), DAX (+1.45%) and FTSE (+1.19%) all higher, while the VSTOXX fell 18.9% to 28.16.

This morning in Asia, markets are rallying on the positive lead from the US. The Kospi (+0.68%), Hang Seng (+1.55%) and China’s CSI 300 (+1.23%) are all up as we type but the Nikkei has given up gains of >1% to trade lower for the day. Datawise, Japan’s January PPI was broadly in line at 0.3% mom and 2.7% yoy while China’s monthly net new loans were higher than expected at RMB$2,900bn (vs. $2,050bn expected).

In the US, President Trump has proposed a $4.4trn federal budget for 2019 that seeks to reduce domestic programs such as Medicare in favour of higher spending on the military and immigration enforcements. The plans will see the deficit almost double in FY19 to $984bln and rise $7.1trn over the next decade.

Mr Trump said he would push for a “reciprocal tax” on imports against higher tariff countries without providing details and reiterated his $1.5trn infrastructure plan of which $200bln federal funds will act as seed funds to incentivise further spending by state and local government as well as the private sector. Notably, both Reuters and NY Times noted Presidential budgets are rarely enacted by the Congress. The budget director Mulvaney called the plans as a “messaging document”, so we’ll wait and see if these messages will translate into any reality.

Yesterday we published a note using our fair value model between credit and volatility to assess where credit spreads should trade if and when the VIX (for US credit) or VStoxx (for European credit) stabilise at various levels. Spikes in vol are rarely sustained outside of a crisis so the fact that the current difference between actual and modeled spreads (see graphs in the note) are at one of the widest points on record isn’t necessarily a cause for major alarm yet. However to cite examples in the note, if equity vol settles at 15, Euro IG and HY should settle 15bps and 68bps wider. For the US, these numbers 24bps and 61bps wider all other things being equal. For vol at 20, these numbers are +27bps, +107bps, +43bps and +145bps respectively. See the full note here for more on this. A reminder that yesterday morning we also put out a quick note comparing this current sell-off across various assets to that seen  during the 34 day taper tantrum in May 2013 and the 60 day risk sell-off after the surprise Fed hike in February 1994. All of them having a rates/yield/inflation related catalyst.

Back to credit, the latest ECB CSPP holdings data was released yesterday. The CSPP/PSPP ratio was 18.4% (28.1% over last 4 weeks). Before Apr 2017 when we were still at full QE the ratio was 11.5%. In the first taper (Apr-Dec 2017) the ratio edged up to 12.7% and since Jan 2018 it has increased to 24.8%. So far this year, QE purchases have been in line with our long-standing expectation that the CSPP/PSPP ratio would move to around 20% after the January taper.

Now recapping other markets performance from yesterday. Government bonds weakened slightly, with core 10y bond yields up 1-3bp. The UST 10y yields rose 0.7bp and Bunds up 1.2bp while Gilts underperformed (+3.1bp), partly weighed down by the hawkish BOE speak. Turning to currencies, the US dollarindex retreated 0.32% yesterday but is  still up c1.7% since the beat on wage growth, while the Euro and Sterling gained 0.32% and 0.08% respectively. In commodities, WTI oil rose for the first time in seven days (+0.15%), in part as OPEC has revised up its demand forecasts and expect global demand to outpace the growth in US shale supply. Elsewhere, precious metals strengthened c1% (Gold +0.46%; Silver +1.16%) and other base metals were broadly higher (Copper +0.45%; Aluminium +1.02%; Zinc -0.38%).

Away from the markets and onto Germany, the latest Sonntagstrend survey showed 57% of Germans want the SPD members to vote and approve a coalition with Ms Merkel’s bloc. The support level is higher amongst SPD and CDU voters, at 85% and 87% respectively.

Elsewhere, our asset allocation strategist Binky Chadha has taken a closer look at the potential causes for the recent pullback in equities. Overall, the team concludes that a long overdue pullback on extended positioning was amplified in US equities by structured products. But despite the size of the pullback it was still just that and likely more to do with the need for liquidity and quick risk reduction. The team also noted 10% corrections in US equities are very rare outside recessions, with only 15 such selloffs since 1950. Further, they are normally associated with a clear unexpected catalyst such as oil price collapse, China devaluation and Russia LTCM. Refer to their note for more details.

In the UK, according to documents sighted by Bloomberg, EU officials will hold a discussion this Thursday on the options for a future trade deal with the UK post Brexit. The meeting looks to discuss the mobility of workers and how cars, chemicals and food safety are regulated in the internal market.

Before we take a look at today’s calendar, we wrap up with other data releasesfrom yesterday. In the US, the monthly federal budget surplus was $49.2bln(vs. $51bln expected) in January. The NY Fed survey of consumer expectations showed median one year ahead inflation expectations fell to 2.71% in January (vs.2.82% previous). Notably, respondents expect wage growth to be 2.73% in the coming year, the highest since the data series began in 2013. In the UK, Acadata noted London house prices fell 4.3% in 4Q17, the largest fall since 2009.

Looking ahead, the January CPI/PPI/RPI report in the UK is the main focus. In the US, the January NFIB small business optimism print will be released. Away from data, the Fed’s Mester is due to speak in the afternoon on monetary policy and the economic outlook. Pepsico will release earnings.


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