Futures, Global Stocks Tumble As Europe Bank, Periphery Carnage Unfolds

The biggest event of the weekend, if not the month, was China's FX reserve outflow update, which at $100BN was slightly better than the $120BN expected (it pushed China's reserves to the lowest in nearly 4 years) but it was in the "no man's land" between the BofA best case scenario ($37.5BN), and the GS worst case ($197BN). And while there was some hope this number, together with China being offline for the next week could lead to some stability across markets, this is what we said yesterday about this indecisive number: "for markets, what this means is that the next month will likely be market by more of the same sharp, illiquid volatility that has characterized 2016 so far."

So far this prediction has proven to be spot on, because while there was some initial risk on sentiment in the Asian ex-China session, where the Nikkei rose 1.1% on the back of an early ramp in the USDJPY (following the latest abysmal wage data out of Japan), everything went from bad to worse once Europe opened, and things started going "bump in the morning" across the European banking sector, where not only has it been more of the same with CDS spreads for major banks - most notably Deutsche Bank - continuing their surge wider, but also EM spreads to Bunds all following, with the Portugal-Germany Yield spread blowing out above 300 bps for the first time since 2014 and other peripheral nations following, such as Italy shown in the chart below:

Italy - Germany pic.twitter.com/XwQOsi2grT

— Guy Johnson (@GuyJohnsonTV) February 8, 2016

Here is a brief summary of the European carnage so far:

• European banks decline, SX7P close to session low as of 11:52am CET (declines 2.6%, previously down as much as 3.3%).
• Greek banks Eurobank Ergasias, Alpha Bank at record low; Monte Paschi follows as 3-worst performer today
  • Eurobank Ergasias sinks ~20% (as much as 21%)
  • Alpha Bank plummets 14% (as much as 18%)
  • Monte Paschi retreats 5.9% (as much as 8%)
• AXIA Ventures notes first round of talks between Greek govt and heads of creditors’ representatives ended on Feb. 5; says all major issues still open, unclear when they’ll return to Athens to continue discussions
• NOTE: Greek Bank Mgmt Review to Start End-Feb: Xenofos in Naftemporiki
• Separately, Italian 10-yr spread with bunds widens for 3rd session; Currently at highest since July

Why the dramatic shift in European risk, where things were relatively stable for months on the heel of Europe's QE? Perhaps Morgan Stanley's note flagged last night had something to do with it. To wit:

One noteworthy aspect in the current risk-off environment is the lack of peripheral spread widening in Europe; this is unusual based on performance patterns during this cycle and most likely reflects the ECB’s substantial QE programme. While the region is often perceived as a relative consensus overweight among equity investors, we are more downbeat and prefer the US and Japan instead. Our European caution primarily reflects the prospect of further earnings disappointment across the region, but we are also wary of any resumption of geopolitical concerns.

 

Recent investor caution tends to focus on fears of excess USD strength, low oil prices and/or China, but we think it is quite plausible that Europe moves back up the pecking order (to its more usual place some would say!) as we move through 2016. The UK’s forthcoming referendum on EU membership, likely to take place in June, may appear the most plausible catalyst in the short term to raise regional risk premia, but the ongoing migrant issue risks eroding political cohesion over the medium term and political uncertainty is rising in the periphery. Greece has a daunting debt repayment due this summer, Spain is currently without a government, new European regulations are preventing Italy from adopting an effective ‘bad bank’ solution and the recently elected socialist government in Portugal is reversing course on prior austerity and competitiveness improvements. During a cyclical upswing, markets are prone to overlook such concerns, but the opposite would be true if growth starts to relapse.

Whatever the reason, one look at DB CDS which continue their relentless march into "something is very wrong with this counterparty" territory suggests that things are going from bad to worse for Europe's banking sector.

It is not just DB: as we have been warning for the past month, and especially last Friday, the blow out across the entire European bank sector is starting to resemble Lehman levels:

Can Draghi sell bank cds? Euro bank risk looks systemic. TBTF cds blowing out throughout EZ- most at 52wk wides. pic.twitter.com/dUZlhErIYO

— J Pierpont Morgan (@pierpont_morgan) February 8, 2016

To be sure, DB appealing to both the BOJ and ECB to stop their easing, as we noted over the weekend, will hardly help things, and if anything will prompt more questions just how bad DB truly is.

And with Germany's biggest bank once again on the ropes, and some even starting to casually throw out the "bailout" word, Germany's stocks fared no better:

• DAX FALLS BELOW 200-WMA
• DAX RSI FALLS INTO OVERSOLD TERRITORY BELOW 3O

Worst of all, there are no near-term catalysts that can help Europe: the slow-motion trainwreck will continue until somehow confidence in eurobank solvency is restored, and now that neither QE nor NIRP can prop up the financial system suddenly Mario Draghi and his Davos "peer-pressuring" company have their jobs cut out for them.

So while the markets stress about the future, and whether Janet Yellen's semi-annual congressional testimony mid week can achieve anything to shift risk sentiment, here is where we stand now.

Market Wrap:

• S&P 500 futures down 1.1% to 1855
• Stoxx 600 down 2.2% to 318.7
• MSCI Asia Pacific up 0.3% to 121
• US 10-yr yield down 2bps to 1.82%
• Dollar Index down 0.18% to 96.86
• WTI Crude futures down 1.9% to $30.31
• Brent Futures down 2.2% to $33.31
• Gold spot up less than 0.1% to $1,174
• Silver spot down 0.3% to $14.97

Top Global News

• Negative Rates Seen as Option for Fed as BOJ, ECB Pave the Way: probability of negative Fed rate climbs to about 13%
• Casino Says to Sell Big C Stake for EU3.1b to TCC Holding: comments in statement yday
• Qube Group Makes Sweetened A$9b Offer for Asciano: target says revised offer is higher than Brookfield’s bid
• INCJ Said to Argue Its $8.5 Billion Sharp Bid Tops Foxconn’s: Sharp has until Feb. 29 to decide on Foxconn bailout plan
• VW Trucks Chief Open to IPO, Deals in Expansion Strategy: unit eyes growth options, may include acquisitions, IPO
• World’s Largest Energy Trader Sees a Decade of Low Oil Prices: Vitol CEO says crude to stay $40-$60 for 10 years

A quick look at regional markets, we begin in Asian where equities started the week on the front-foot in holiday-thinned trade, despite the sell off on Wall Street after the latest mixed NFP release. As participants digested the US jobs report, the ASX 200 (-0.02%) and the Nikkei 225 (+1.1%) pared initial losses amid a turnaround in sentiment, while the latter had pulled off worst levels amid a softening JPY across the board. JGBs slipped amid spill over selling in USTs with yields rising across the curve, as such notable underperformance in the belly of the curve. As a reminder, markets in China are closed due to the Lunar New Year.  

Asian Top News

• Consumption Seen Dropping as Japan’s Workers Eke Out 0.1% Rise: Total wages haven’t risen more than 1% in any yr since 1997, labor ministry said
• Gold Road Says Major Producers Interested in Gruyere Stake: AU gold explorer is prepared to discuss partnering on gold asset
• Modi Budget Resolve Tested as Bonds Have Worst Start Since 2011: Investors confidence in PM Modi’s ability to meet budget targets dwindling as bonds and stocks posted steepest Jan. losses since 2011
• China Venture Firm Raises $648 Million From Princeton, Duke: Qiming Venture Partners saw largest fund since it was founded in 2006, brings AUM to $2.5b

With much of Asia away from their desks this week for the Lunar New Year, European trade failed to find sentiment early on in the session, before equities began to selloff by mid-morning (Euro Stoxx: -2.4%). However, despite the weakness seen in equities, many of the 'usual suspects are among the best performers today, with the materials the best performing on a sector breakdown, while the worst performing major European index YTD, the FTSE MIB (-1.9%) the best performing index of the day.

European Top News

• Assa Abloy Profit Meets Estimates Amid Growth in U.S., Europe: Says growth in U.S. offset China sales decline
• Randgold’s 4Q Profit Falls 10% as Gold Prices Drop: Aims to mine 1.25m-1.3m ounces of gold in 2016
• Anglo Platinum Sees More Price Pain as It Halts New Projects: Impairments of 14b rand represents 30% of book value
• BT Confirms Search Process for CFO Successor; No Decision Taken: Co. responds to press speculation
• Linde Says Reitzle Proposed as Chairman of Supervisory Board: Proposes to elect Wolfgang Reitzle as of May 21
• Millicom to Sell its Democratic Republic of Congo Business: Sells 100% of Oasis for total cash of $160m to Orange
• Amundi, Primonial in Talks to Buy EU1.3b Gecina Assets, Figaro says: In exclusive talks to buy 74 clinics, medicalized retirement homes from Gecina for EU1.3b
• Areva CEO to Discuss Possible Gamesa Stake Sale With Govt Echos says: Newspaper cites interview with Areva CEO
• Pimco Sees Biggest Flows in Europe From Yield-Hungry Insurers: Insurance asset management ‘one of the main opportunities’

In FX, a largely consolidative market in FX this morning, with this widely anticipated given the absence of China this week. However, in recent trade, USD/JPY has slipped back under 117.00 with stocks and Oil prices leading the way, and having the inverse impact on EUR/USD which is some 40-45 ticks higher to tip 1.1180. AUD saw some modest catch up play on the upside, but this has been tempered by the broader mood. CAD poised for fresh weakness also, and eyeing a return through 1.3900. EM currencies on the softer side, but only off better levels despite concerns over funding/investment levels highlighted by the BIS numbers. GBP on the soft side, as EU fears starting to bubble up once again — EUR/GBP through .7700.

WTI and Brent crude futures have sold off heading into the North American crossover, with Brent Apr'16 and WTI Mar'16 futures breaking below the USD 34.00 and USD 31.00 levels respectively. This comes in spite of news over the weekend that the Venezuelan and Saudi Oil Ministers had positive discussion in regards to OPEC/non-OPEC cooperation to stabilize oil markets. Such news may have moved oil markets previously, but now the level of scepticism around the chances of such a meeting happening seems to have increased significantly. Furthermore, speculators cut bullish bets on US crude oil in the week to, according to the CFTC.

Gold prices fell over USD 7 shortly after the reopen of the week's electronic trade amid touted profit taking having posted its best weekly gain since July'13 last week. However there has been strong inflows into gold ETF's and CFTC says COMEX gold speculators increased their bullish bets in the yellow metal to 3 month highs.

There is no macro news in the US today.

Bulletin Headline Summary from RanSquawk and Bloomberg:

• A largely consolidative market in FX this morning - widely anticipated given the absence of China this week
• WTI and Brent crude futures have sold off heading into the North American crossover, with Brent  Apr'16 and WTI Mar'16 futures breaking below the USD 34.00 and USD 31.00 levels respectively
• Today's calendar is very quiet in terms of data, however highlights include: Canadian housing  starts and building permits as well as possible comments from BoC Deputy Governor Lane
• Treasuries higher in overnight trading as European equities drop (China closed for holiday) ahead of this week’s Yellen testimony before Congress on Wednesday and Thursday.
• China’s foreign-exchange reserves shrank to $3.23 trillion, the smallest since 2012, indicating that the central bank sold dollars as the yuan’s retreat to a five-year low exacerbated depreciation pressure
• Federal Reserve Chair Yellen is preparing to walk a tightrope when she addresses lawmakers in Washington; she will have to strike a balance between sounding confident on the domestic economy and acknowledging increased risks from abroad
• Signs of distress in financial markets are gathering force as concern over the state of the global economy deepens. European stocks are down for a sixth day, the cost of protecting European banks’ and insurers’ senior debt is on its worst run since March 2013 and yields on Germany’s 10- year bunds are the lowest since April
• Core EGBs bull flatten as credit-spreads widen and stocks selloff; peripherals underperform sharply, wider by 9bps-18bps vs 10Y bunds
• Goldman Sachs is betting “Mr. Market” is wrong in its recession warnings. While sliding stocks, declining long- term bond rates and higher credit yields are sounding the alert, the bank’s economics team is more confident about the outlook for the developed world
• Societe General has turned to the U.K.’s finance regulator as it tries to loosen rivals’ grip on European junk-bond issuance. A lack of competition is harming both issuers and investors by reducing market efficiency, according to the bank
• The investment banking downsizing has been hard on foreign- exchange desks; there were 2,300 people working in currency- market front-office jobs at the world’s biggest banks in 2014, down 23% from 2010
• While investors pulled funds from Pimco in the wake of co- founder Bill Gross’s departure, yield-hungry insurance companies kept faith with the company
• Sovereign 10Y bond yields mixed with Greece +38bp, Portugal +14bp. European stocks lower, Asian stocks mixed (China closed for holiday); U.S. equity-index futures drop. Crude oil and copper lower, gold rises

US Event Calendar

• 10:00am: Labor Market Conditions Index Change, Jan., est. 2.5 (prior 2.9)

DB's Jim Reid concludes the overnight wrap

So after what can only be described as a pretty noisy US employment report on Friday in which a disappointing headline payrolls number was shrugged off in favour of some unexpected improvement in the details, economists and investors will get another opportunity to sharpen (or blunt) Fed expectations this week when Fed Chair Yellen addresses the House Financial Services Committee on Wednesday and the Senate on Thursday at her semi-annual testimony (also formerly known as the ‘Humphrey-Hawkins Testimony’). While Friday’s data has seen futures markets since price in a slightly better than 50% chance of a hike this year (currently 53%), that put in the perspective of the four hikes implied by the dot plots and the huge gap still between the two means Yellen will have to choose her words wisely. The last couple of weeks have seen more evidence of a dovish leaning from Fed officials, including Fischer and Dudley and we’d expect Yellen to echo a similar acknowledgement of recent tightening in financial conditions and increased global growth concerns.

It’s likely that this will be somewhat balanced with upbeat commentary around the labour market in particular despite that below-market January payroll number (151k vs. 190k expected). In fairness this was about in line with the whisper number while much was made of the three-month moving average being at a still robust 231k. It was the details in the report which got most talking however. After expectations had been for no change, the unemployment rate declined one-tenth last month to 4.9% and a post-recession low. The broader U-6 measure held steady at 9.9%. Meanwhile average hourly earnings rose an impressive +0.5% mom (vs. +0.3% expected) meaning on a YoY rate earnings are +2.5%.

A short-lived sharp drop aside, the Dollar index closed up +0.58% on Friday following the data and helped to slightly dampen what was a rough week for the Greenback with the five-day fall for the index (-2.59%) the most since October 2011. Treasury yields initially jumped higher but then pared that entire move into the close. 10y Treasury yields were up as high as 1.894% (+5bps on the day) before falling back to 1.840% by the finish. The data was less kind to risk assets however although a weak day for tech stocks didn’t help (LinkedIn in particular tumbling 40% following some much softer than expected management guidance for Q1) with the S&P 500 eventually closing down -1.85% and the Nasdaq down a steep -3.25%. In credit markets CDX IG finished over 5bps wider. Oil resumed its downward march with WTI eventually finishing -2.62% and back below $31/bbl although Gold continued its strong run of late, closing up +1.54% for its sixth consecutive daily gain and at $1173/oz is now at the highest since the end of October.

Over the weekend the main news of note is out of China where the latest FX reserves data is in. Reserves declined $99.5bn in the month of January to $3.23tn (vs. $3.21tn) - the third consecutive month that reserves have fallen and the second most on record. With Chinese New Year kicking off today and markets there subsequently closed (as well as in a number of other Asia economies), markets are a bit more muted in Asia this morning. In Japan we’ve seen the Nikkei (+0.77%) pare some early steep losses to trade higher, while in Australia the ASX (-0.03%) is back to near unchanged. WTI is up 1% after a meeting between Oil Ministers from Saudi Arabia and Venezuela on the weekend was said to be ‘productive’ but seemingly yielded nothing more. US equity market futures are signaling some small gains.

Moving on. In the wake of Friday’s data, DB’s Chief US Economist Joe Lavorgna has revised down 2016 growth and inflation forecasts, while at the same time has altered his Fed rate call to just one hike this year which he expects to be in December. Highlighting tighter financials conditions, elevated inventories, weak global growth and depressed energy-related capital spending, Joe has reduced his estimates of Q1, Q2 and Q3 real GDP growth in 2016 to 0.5%, 1.0% and 1.2% from 1.5%, 2.2% and 2.1% respectively. Consequently, he expects full-year 2016 real GDP growth, as measured on a Q4-over-Q4 basis to now be 1.3% (from 2.0%). With regards to core CPI, Joe is forecasting 1.9% yoy in Q1, followed by 1.8% in Q2-Q4.

In terms of the rest of Friday’s data, the December US trade balance revealed a modest widening in the deficit by just over $1bn to $43.4bn (vs. $43.2bn expected). Post the market close we got the latest consumer credit data covering December which was much higher than expected at $21.3bn (vs. $16.0bn expected). Reflecting the latest forecast for real consumer spending growth post Friday’s employment report and also for real gross private domestic investment growth, the Atlanta Fed upgraded their Q1 2016 real GDP growth forecast to 2.2% from 1.2% on February 1st.

European risk assets succumbed to much of the post-payrolls weakness on Friday too with the likes of the Stoxx 600 (-0.87%) and DAX (-1.14%) closing lower following a fairly choppy session. It’s been the moves in credit however and specifically financials which are starting to take up more attention. Main closed +5.5bps on Friday, while Crossover finished +17bps, but it was the moves for senior (+13bps) and sub-financials (+28bps) which were more eye catching. In fact, YTD the sub-fins index is +122bps wider, which compares to Crossover which is +107bps wider. Senior financials are now +44bps wider while Main is +33bps wider. A lot of this reflects what’s been a particularly disappointing quarter for earnings in the sector which is adding to the energy and global growth related worries, but the concern is that it could be something more and is certainly something else for Draghi to consider ahead of next month. It’s noticeable also that there are a number of bank share prices now approaching or even slightly below 2008/09 levels.

That takes us to the latest in earnings season which in the US has now passed the half way mark. There wasn’t much to report from Friday’s reporters, but with 315 S&P 500 companies having now reported, we’ve seen 244 (77%) beat on earnings but just 146 (46%) beat at the sales line. A reminder of how that compares to previous quarters. From Q1 to Q3 last year we saw 73%, 75% and 74% beat at the earnings line, but just 48%, 49% and 44% report beats at the top line. So a fairly mixed bag this quarter. European earnings season is still to get going properly and so far we’ve seen 199 Stoxx 600 companies report with 50% beating earnings guidance and 64% sales guidance. It’s worth highlighting that the data for European earnings is a lot more inconsistent however.

Onto the week ahead now. It’s a fairly quiet start to proceedings this week with the only data of note in Europe being German industrial production for December and confidence indicators for the Euro area and France. The usual post-payrolls lull in the US means there’s no data due across the pond today. Tuesday’s highlights include trade reports covering the December month out of both Germany and the UK, while across the pond the January NFIB small business optimism reading is due out, along with the December JOLTS report and wholesale inventories and trade sales data for the same month. Turning to Wednesday we’re starting in Japan where the latest January PPI numbers are due out. In Europe we’ll get regional industrial production reports for Italy, France and the UK while the sole release in the US in the afternoon is the January Monthly Budget Statement. It’s a particularly quiet day for data on Thursday with nothing of note in Europe and just initial jobless claims data due in the US. It looks like we’ll have a busy end to the week on Friday with Euro area Q4 GDP and industrial production, French employment data and German Q4 GDP and CPI all due out. In the US the big focus will be on the January retail sales data along with the first reading for the University of Michigan consumer sentiment print for February and December business inventories data.

Arguably the focus of the week will be away from the data and instead reserved for the aforementioned Fed Chair Yellen’s semi-annual testimony to the House Financial Services on Wednesday and the Senate on Thursday. Also due to speak will be the Fed’s Williams on Wednesday and Dudley on Friday. Meanwhile we’ll also see the attention for the US presidential election move to New Hampshire which is due to hold the first-in-the-nation primary on Tuesday.

Elsewhere, earnings season rumbles on and we’ve got 64 S&P 500 companies set to report including Coca-Cola, Walt Disney and Cisco. In Europe we’ve got 80 Stoxx 600 companies reporting including Total, L’Oreal, Heineken and Nokia.