Whether this week's market surge was catalyzed by two consecutive "technical problems" in the bond market, first the unexpected failure of the Fed's MBS POMO on Wednesday and then the 7 Year Treasury auction's last minute cancellations yesterday, and quite clearly it was...
... is irrelevant as the short squeeze has not only returned with a vengeance...
... but the critical 1,950 resistance and 50 DMA in the S&P500 was taken out...
... with the final push yesterday, opening the way for the market to surge even higher on ever lower volume in the latest market-wide stop-hunt attempt, one which based on collapsing forward earnings may just see the S&P retest a 20x forward GAAP P/E multiple before the selling resumes.
As a result, the global stock rally has continued overnight, pushing US equity futures higher by another 14 points as of this moment, or up 0.7%% to 1965 while oil also gained alongside industrial metals as China’s central bank said it sees room for monetary easing in the build-up to Group of 20 finance chiefs’ discussions on the global economy.
While Jack Lew previously said not to expect any "crisis" response out of the G-20 because there is no crisis, overnight PBoC Governor Zhou Xiaochaun generated a few headlines when he said that ‘China still has some monetary policy space and multiple policy instruments to address possible downside risks’. He added that, ‘at the same time fiscal policy will be more proactive, reducing taxes and increasing fiscal deficits temporarily’. Zhou also reiterated that there was no basis for ‘persistent renminbi depreciation’ and that the ‘exchange rate will reflect the economic fundamentals’ in the long term.
Meanwhile German Finance Minister has followed up with some comments of his own at the G20 meeting, making clear his view of opposing G20 fiscal stimulus after saying that ‘talking about further stimulus just distracts from the real tasks at hand’ and that German policy makers ‘do not agree on a G20 fiscal stimulus package, as some argue in case outlook risks materialize’.
With the conclusion of this weekend's G-20 unknown, and many still expecting a major stimulus, the squeeze will likely continue into the close of trading ahead of the weekend when nobody will want to be caught short into what may end up being another global coordinated intervention to prop up markets.
As Bloomberg summarizes, shares in Europe headed for their second weekly advance and futures signaled the Standard & Poor’s 500 Index will extend gains after Thursday reaching levels last seen at the start of the year. Industrial metals rebounded, Brent crude climbed for a third day, credit markets strengthened and Russia’s ruble led gains in emerging-market currencies. Royal Bank of Scotland Group Plc plunged after saying it would take longer than originally planned to resume shareholder payouts.
Whether leading or lagging, oil continues to rise and was up 2% to $33.7 after a desperate, cash flow bleeding Venezuela had its Oil Minister Eulogio Del Pino say (once again) said producers are discussing the location for mid-March meeting, hoping the price of oile rebounds modestly so it can delay its day of default by at least a few days. He also said that Venezuela, Russia, Qatar, and Saudi Arabia are also planning to meet in July for follow-up on production-freeze effects on prices. "There’s no capacity to continue putting oil on the market. If this situation continues we’ll have a collapse in oil prices."
It is unclear what exactly he hopes to achieve: Saudi's al-Naimi made it very clear that Saudi Arabia will simply not cut, and since the production freeze at record levels is already priced in, the best he can get is another algo-driven short squeeze.
As noted above, attention this weekend will be on Shanghai where the G-20 meeting is taking place, and where PBOC Governor Zhou Xiaochuan said he still has monetary policy tools at his disposal and there is no reason for yuan depreciation. While stocks gained and oil prices extended a rebound from a 13-year low, the recovery remains weak with more than $6 trillion erased from the value of global equities this year. China’s slowdown has fed into other markets by weakening commodity prices and raising concern producers will struggle to repay debt.
“With a lot of policy events coming there is a fair chance of more stimulus plans so the markets can squeeze higher,” said Benno Galliker, a trader at Luzerner Kantonalbank AG. "The big reversal shows that there is some expectation building up into those events."
Absent some dramatic reversal, such as Gartman covering his shorts and going unexpectedly long, expect the low-volume, upward momentum to continue into the G-20 weekend.
* * *
Quickly going through the regional markets' overnight action, we start in Asia where equities traded mostly higher following the positive lead from Wall St. where energy gains continued to dictate risk-sentiment. Nikkei 225 (+0.3%) took the impetus from US markets and extended on yesterday's outperformance with a weaker JPY bolstering exporter names, although Sharp shares declined sharply after Foxconn delayed signing its bailout deal. ASX 200 (-0.17%) underperformed as several poor earnings results and weakness in materials, after iron ore prices declined below USD 50/ton, capped upside to the index. Shanghai Comp (+0.9%) conformed to the upbeat tone with sentiment lifted after the PBoC injected CNY 300Bn in liquidity and PBoC Governor Zhou signalled confidence in the economy, while China property prices continued to show an improvement in the sector. 10yr JGBs traded higher throughout the session, despite the risk-on sentiment in the region with the BoJ also conducting its large asset purchase program for JPY 570Bn of government debt.
PBOC Governor Zhou said China's economy remains strong and there is still room for monetary policy and tools. The PBoC also stated that it has prudent monetary policy with a slight easing slant and that there is no basis for persistent CNY weakness.
In Europe, the week's final European session of the week has seen equities kick off where they left yesterday, trading firmly in positive territory to pare much of the downside seen earlier in the week. Euro Stoxx (+2.2%) has been led by energy and material names once again today, however the FTSE (+1.2%) underperforms after RBS' (-9.0%) latest downbeat earnings. In terms of fixed income, despite the strength in European equities, Bunds failed to extend on their opening losses, with the German benchmark hovering around the 160.00 level throughout the morning as downside was capped by downbeat data in the form of French CPI and regional German CPIs
In FX, there has been relative calm helped by improving sentiment in the equity and commodity markets. Some decent gains seen in GBP, where Cable has returned through 1.4000 again, though stalling ahead of 1.4050 for. Decent gains seen against then EUR also, with the cross rate dipping below .7850 and pulled EUR/USD back into fresh bids seen ahead of 1.1000. EU sentiment indices were on the softer side of expectations, but this had a temporary/marginal impact on the single unit. Elsewhere, the CAD remains on the front foot, and still looking to build on the strong gains seen from the mid 1.3800's against the USD, with 1.3500 the next big figure under threat. NZD consolidated the gains seen in Asia, but remains bid along with the AUD. Key data release this afternoon is the 2nd Q4 GDP estimate in the US.
In commodities, base metals rose, supported by Zhou’s comments, with nickel in London rising 1.7 percent and copper advancing 1.6 percent. Oil extended gains as Russia said talks with Iran are continuing before a planned producer meeting next month on a proposed output freeze amid a global glut.
West Texas Intermediate rose 2.1 percent to $33.75 a barrel. Russia’s output cap with Saudi Arabia will need to be in place for a minimum of 12 months to support prices, Energy Minister Alexander Novak said Thursday. A meeting with Iranian Oil Minister Bijan Namdar Zanganeh is possible next month, he said. Iran, seeking to boost exports after sanctions were lifted, said the deal is “ridiculous,” while Iraq said a pact hinges on unified support.
Gold for immediate delivery fell 0.2 percent to $1,230.82 an ounce in London. The metal is still up 10 percent this month, the most since January 2012, boosted by concerns over a global slowdown.
The U.S. natural gas futures for April delivery rose as much as 1.1 percent to $1.805 a million British thermal units on the New York Mercantile Exchange. The contract for March delivery, which expired Thursday, slumped to the lowest in almost 17 years because of a surging production at a time as mild weather curbs demand for fuel.
On today's US calendar, the big focus will be on the second reading for Q4 GDP where the market is expecting the print to get revised down from +0.7% qoq to +0.4%. That would be the weakest on a quarterly basis since Q1 14. Along with the GDP number, the Core PCE deflator is worth keeping an eye on, along with personal income and spending. The January advance goods trade balance will be released too while the final February revisions to the University of Michigan consumer sentiment print will round off the week. Fedspeak continues with Powell and Williams (3.15pm GMT) both taking part in a panel discussion, while Brainard (at 6.30pm GMT) is speaking later tonight.
Bulletin Headline Summary from RanSquawk and Bloomberg
- A sea of green for European equities in the final session of the week following on from the relatively firm lead from their Asian counterparts.
- The energy complex extends on gains following reports of a March meeting between Saudi Arabia, Russia, Qatar and Venezuela.
- Looking ahead, highlights include US GDP & U. of Mich. Sentiment as well as comments from Fed's Powell (Neutral, Voter) and Brainard (Voter, Dove).
- Treasuries lower in overnight trading as global equity markets, commodities rally on hopes of further monetary easing from China; U.S. Treasury will close $28b 7Y auction, which was delayed yesterday due to technical issues, at 11:30am ET.
- As the G-20 meet in Shanghai, People’s Bank of China Governor Zhou Xiaochuan saying he still has monetary policy tools at his disposal and there is no reason for yuan depreciation
- The greenback plays the biggest role in a group of currencies against which China’s central bank pegs the yuan, he confirmed
- Global finance chiefs split over how best to revive the world economy as central bankers and finance ministers from the Group of 20 developed and emerging markets gathered for talks in Shanghai
- Euro-area inflation looks to be cooling faster than expected, with national data missing economists’ estimates and strengthening the case for an expansion of the European Central Bank’s monetary stimulus in March
- Euro-area economic confidence fell for the second month in February, as the index of executive and consumer confidence slumped to 103.8 from a revised 105.1; that’s the lowest since June
- Royal Bank of Scotland said it will take longer than originally planned to resume shareholder payouts after reporting its eighth consecutive annual loss, driven by costs for past misconduct. The shares dropped the most since 2012
- The chairman said his firm doesn’t pursue highly paid investment bankers anymore, as it cut the number of million-euro earners and its bonus pool amid the continued shrinking of its securities unit
- $16.2b IG corporates priced yesterday (YTD volume $273.1b) and $1.25b HY priced (YTD volume $12.625b)
- Sovereign 10Y bond yields mixed with Portugal and Greece yields rallying 17bp/11bp; European, Asian markets rise; U.S. equity-index futures higher. Crude oil and copper rally, gold falls
US Event Calendar
- 8:30am: Advance Goods Trade Balance, Jan., est. -$61.2b (prior -$61.513b)
- 8:30am: GDP Annualized q/q, 4Q S, est. 0.4% (prior 0.7%)
- Personal Consumption, 4Q S, est. 2.2% (prior 2.2%)
- GDP Price Index, 4Q S, est. 0.8% (prior 0.8%)
- Core PCE q/q, 4Q S, est. 1.2% (prior 1.2%)
- 10:00am: Personal Income, Jan., est. 0.4% (prior 0.3%)
- Personal Spending, Jan., est. 0.3% (prior 0%)
- Real Personal Spending, Jan, est. 0.3% (prior 0.1%)
- PCE Deflator m/m, Jan. est. 0% (prior -0.1%)
- PCE Deflator y/y, Jan., est. 1.1% (prior 0.6%)
- PCE Core m/m, Jan., est. 0.2% (prior 0%)
- PCE Core y/y, Jan., est. 1.5% (prior 1.4%)
- 10:00am: U. of Mich. Sentiment, Feb. F, est. 91 (prior 90.7)
- Current Conditions, Feb. F (prior 105.8)
- Expectations, Feb F (prior 81)
- 1 Yr Inflation, Feb F (prior 2.5%)
- 5-10 Yr Inflation, Feb F (prior 2.4%)
- 10:15am: Fed’s Powell speaks in New York
- 10:15am: Fed’s Williams speaks in New York
- 11:30am: U.S. Treasury will close $28b 7Y auction delayed yesterday due to technical issues
- 1:30pm: Fed’s Brainard speaks in New York
DB's Jim Reid concludes the overnight wrap
The bear and bull case in the last 24 hours was made up of China in the former camp and better oil price action and US data on the other. The bulls have got the upper hand and its continuing this morning as a combination of the gains on Wall Street last night and some supportive comments out of the PBoC at the G20 meeting have helped push Asian bourses higher. The Shanghai Comp and CSI 300 are +0.43% and +0.65% at the midday break, while the Nikkei is +1.20% after Japan’s headline CPI (0.0% yoy as expected) dipped a couple of tenths lower and closer to deflation last month. The Hang Seng is +1.61% while bourses in Korea and Australia are near unchanged.
With regards to those comments this morning, PBoC Governor Zhou Xiaochaun generated a few headlines when he said that ‘China still has some monetary policy space and multiple policy instruments to address possible downside risks’. He added that, ‘at the same time fiscal policy will be more proactive, reducing taxes and increasing fiscal deficits temporarily’. Zhou also reiterated that there was no basis for ‘persistent renminbi depreciation’ and that the ‘exchange rate will reflect the economic fundamentals’ in the long term. Meanwhile German Finance Minister has followed up with some comments of his own at the G20 meeting, making clear his view of opposing G20 fiscal stimulus after saying that ‘talking about further stimulus just distracts from the real tasks at hand’ and that German policy makers ‘do not agree on a G20 fiscal stimulus package, as some argue in case outlook risks materialize’. A reminder that we firmly believe that helicopter money is coming but that it will take the next recession to focus politician's minds. We're not there yet.
So with that gain for Oil (+2.86%) yesterday - which was seemingly sparked by more chatter that Venezuela, Russia, Saudi Arabia and Qatar have agreed to a March meeting – along with the much better than expected US durable goods data (which we’ll touch on shortly), it was a pretty constructive session all round for equity markets. Also helping things was a decent move for financials, particularly in Europe. A near 3% move for the sector led the Stoxx 600 to a +1.97% rebound with most pointing towards the big rally for Lloyds (shares up 14%) in particular as the driving force after the bank raised its dividend payout and announced a special payment. That seemed to be enough to spark a big rally in financials globally with the sector also the top performer for the S&P 500 which eventually closed up +1.13%. European credit was a slight underperformer with the gains for financials not really filtering through for Senior (-2bps) and Sub (-1bp) fins indices. Main and Crossover both finished 2bps tighter at 110bps and 441bps while across the pond CDX IG was nearly 2bps tighter in another bumper day for issuance, with the current weekly volume ($48bn) in US IG now the second biggest this year.
Switching over to that better data, headline durable goods orders rose a better than expected +4.9% mom (vs. 2.9% expected) in January, while the ex-transportation print also beat at +1.8% mom (vs. +0.3% expected) after both had dipped materially lower in December. Encouragingly the data also included a robust +3.9% mom gain in core capex orders (vs. +1.0% expected) which was the biggest monthly increase since June 2014. The data was also strong enough for the Atlanta Fed to lift their Q1 GDP forecast by one-tenth to 2.5% from the last change on February 19th. It’s worth noting that they are ahead of current market expectations for this quarter.
The rest of the data yesterday was a bit more of a mixed bag. Initial jobless claims rose 10k last week to 272k although the four-week average declined to a new low for the year at the same level. The FHFA house price index rose +0.4% mom in December (vs. +0.5% expected) while the Kansas City Fed’s manufacturing activity index fell another 3pts to a lowly -12pts (vs. -6 expected) with an improvement in new orders offset by a steep fall in the number of employees.
Elsewhere, it’s worth highlighting the latest on the migrant crisis which, given other themes dominating markets this year, has flown slightly under the radar from a market perspective. The latest update is the news that Austria and nine Balkan states have confirmed an effective partial closure of the border along the Balkan migrant route, going against the commitment made at the EU summit last month. As a result of this, the FT has reported a significant drop-off in the number of asylum-seekers attempting to cross into Germany (including pictures of empty reception centers). Interestingly while the actions of Austria and co may have posed serious issues for German Chancellor Merkel’s push for an EU-wide solution to the crisis, the decline in the number of asylum seekers entering Germany may also prove positive ahead of the German state elections on March 13th which are looking more and more important by the day. On the other hand a huge backlog of refugee and migrant applications has now built up in Greece. DB’s George Saravelos highlighted yesterday that Greek PM Tsipras is now saying that the Greek government will veto any EU agreement at the EU-Turkey summit on March 7th unless there is pan-European agreement to relocate the refugees, especially as they are know accumulating in Greece with less places to go. This looks like one worth keeping a close eye on.
Before we look at the day ahead and just wrapping up the dataflow, there weren’t too many surprises to be had in the data we saw in Europe. The final reading for Euro area headline inflation in January was revised down a modest one-tenth to +0.3% yoy, while the core was kept unchanged at +1.0% yoy. In the UK we saw the second reading of Q4 GDP unchanged from the initial estimate at +0.5% qoq. Meanwhile there was some support to be had in the ECB’s money and credit aggregate numbers for January. M3 money supply growth was up a better than expected three-tenths to +5.0% yoy (vs. +4.7% expected) while loans to non-financial corporates nudged up to +0.4% yoy (from 0.0%) and household loans held steady. The data should be comforting to the ECB ahead of next month’s meeting.
Looking at today’s calendar, the early data out of Europe this morning will be in France where we’ll get both the February CPI data as well as a second reading on Q4 GDP. This will be followed up later this morning by the latest confidence indicators for the Euro area before we move to Germany with the preliminary February CPI report. The big focus over in the US this afternoon will of course be on the second reading for Q4 GDP where the market is expecting the print to get revised down from +0.7% qoq to +0.4%. That would be the weakest on a quarterly basis since Q1 14, while our US economists are even more bearish and are forecasting for a sharp downward revision to +0.1% on much lower inventory levels. Along with the GDP number, the Core PCE deflator is worth keeping an eye on, along with personal income and spending. The January advance goods trade balance will be released too while the final February revisions to the University of Michigan consumer sentiment print will round off the week. Fedspeak continues with Powell and Williams (3.15pm GMT) both taking part in a panel discussion, while Brainard (at 6.30pm GMT) is speaking later tonight. Over at the ECB we’ve got Praet due to speak tonight (6.30pm GMT). It’ll also be worth keeping an eye on further developments at the G20 Finance Minister’s meeting in Shanghai with the conference due to conclude tomorrow.