Just as US equity futures were about to roll over following some very substantial misses yesterday by the likes of Google, Microsoft, Starbucks and a plunge in Visa shares, overnight who came to the markets' rescue but the BOJ, when shortly after midnight Bloomberg reported that "according to people familiar with talks at the BOJ" which is the traditional keyword for a BOJ source testing out the market's reaction, Japan's central bank may "help" local banks to lend by offering a negative rate on some loans. This happens just months after the BOJ unleashed negative rates thereby "penalizing" banks who hold too much excess reserves. So just four months after the BOJ went nuclear on its own banks, now it has had a 180 degree change of heart.
The result was immediate: the Yen tumbled, USDJPY spiked and the Nikkei soared by 200 points in the blink of an eye.
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Such a discussion could happen in conjunction with any decision to make a deeper cut to the current negative rate on reserves, said the people, who asked not to be named as the matter is private. The BOJ’s Stimulating Bank Lending Facility, which now offers loans at zero percent interest, would be the most likely vehicle for this option, they said.
The officials said that adding this to the central bank’s arsenal could have a positive impact on the economy, but would also raise questions about giving subsidies to commercial lenders. Financial institutions, who already feel penalized by the existing negative rate, could face demands from borrowers to cut their lending margins further, said the people.
This coupled with rising speculation that the BOJ may announce that it will double the pace of its ETF purchases next week, was enough to send the USDJPY soaring by more than 130 pips, as right after the Bloomberg "market trial balloon" was released, USDJPY spike to 110, at which point it took out all the stops and is now trading about 110.50. Japanese bank shares promptly rallied on optimism the measure could be adopted, with the Nikkei closing up 1.2% on nothing but another rumor of central bank intervention.
However, the BOJ's trial balloon has not been enough to push European (or global) stocks notably higher and in Europe stocks fell led by carmakers as emission probes loomed over Daimler AG and PSA Group, while Asian equities slid from a four-month high.
Daimler fell 5.3 percent, dragging a gauge of automakers to the biggest drop of the 19 industry groups on the gauge. The Mercedes-Benz maker was asked by the U.S. Department of Justice to investigate the certification process of its cars. It said a U.S. class action lawsuit alleging some of its cars violated emissions standards is “baseless.” Meanwhile PSA Peugeot Citroen fell 3.3 percent after the group’s premises in France were searched by government fraud investigators as part of a probe into vehicle emissions.
Raw materials fell as steel futures slumped in China after exchanges announced measures to cool speculation and Goldman Sachs Group Inc. cut price outlooks metals and crops. “Our expectation is the oversupply in the iron ore market will return,” Christian Lelong, an analyst at Goldman Sachs, said on Thursday. “It’s going to be very hard to have strong enough demand growth in the Chinese steel sector to keep things in balance.”
Initially in the overnight session, commodities trimmed this week’s gains in steel reinforcement bars to soy beans and cotton that had stoked the outlook for inflation around the world. Carmakers are under renewed scrutiny after Volkswagen AG cheated on emissions tests.
But the biggest driver was the major earnings disappointment out of Google and Microsoft on Thursday which dimmed the outlook
for earnings after results from American companies’ suggesting that the disappointing earnings season was not going to any "better" than had been earlier expected.
Caterpillar Inc., McDonald’s Corp., General Electric Co. and American Airlines Group Inc. are scheduled to report earnings on Friday. Analysts are projecting a 9.5 percent decline in first-quarter profit for S&P 500 members, compared with forecasts for flat growth at the start of the year.
Global market summary
- S&P 500 futures little changed at 2081
- Stoxx 600 down 0.7% to 347
- FTSE 100 down 1% to 6321
- DAX down 0.9% to 10339
- German 10Yr yield down 2bps to 0.22%
- Italian 10Yr yield down 1bp to 1.45%
- Spanish 10Yr yield down 2bps to 1.58%
- S&P GSCI Index down 0.2% to 347.6
- MSCI Asia Pacific down 0.4% to 134
- Nikkei 225 up 1.2% to 17572
- Hang Seng down 0.7% to 21467
- Shanghai Composite up 0.2% to 2959
- S&P/ASX 200 down 0.7% to 5236
- US 10-yr yield down less than 1bp to 1.85%
- Dollar Index up 0.25% to 94.84
- WTI Crude futures up 0.4% to $43.35
- Brent Futures up 0.2% to $44.61
- Gold spot down 0.2% to $1,246
- Silver spot up 0.9% to $17.15
Global Top News
- BOJ Officials Said to Eye Possible Negative Rate on Loan Program: BOJ may consider offering a negative rate on some loans
- Schlumberger Cuts More Jobs as CEO Sees Industry Cash Crisis: net income declined to $501 million from $975 million year ago
- Daimler Probes Diesel Emissions as Quarterly Profit Slumps: carmaker probes emissions at request of U.S. authorities
- Blackstone Said to Weigh Buyout of Canada’s Concordia Healthcare: Other bidders may also be interested in company
- Alphabet Profit and Sales Hit Speed Bump on Mobile Costs Traffic Acquisition Costs rise as more searches go mobile
- Microsoft’s Turnaround Skids as Software Sales Lag Behind Cloud: Nadella’s transition to cloud, subscriptions to take time
- Obama Praises EU in U.K. Op-Ed Aimed at Swaying Brexit Vote: U.S. president accused of hypocrisy by ‘Leave’ campaigners
- Starbucks Sales Trail Estimates as Growth Slows in Americas: co. reaffirms annual sales and store-addition targets
- Visa Alters Terms of Europe Deal and Warns of Delay; Shares Fall: purchase may not be completed until after June
- Valeant Is Seeking Perrigo’s Papa as New CEO, WSJ Reports: co. had been aiming to announce move as early as next week: WSJ
- Apple Says ITunes Movies, Book Services Closed Down in China: closings ordered by Chinese regulator, New York Times reports
- SunEdison Seeking Equity Partners for Operations in India: SunEdison won projects in India with record-low bids
- SecureWorks Prices IPO of 8 Mln Shares at $14.00/Shr: Shares to begin trading on NASDAQ today
- Uber Drivers’ $100 Million Deal May Set Pace for Gig Economy: biggest ride-share firm avoids risk of costly trial verdict; Companies reporting earnings today include GE, Honeywell, Caterpillar, McDonald’s
Looking at regional markets, Asia traded with a sombre tone following weak earnings releases in the US, coupled with profit taking seen in the region. Nikkei 225 (+1.2%) initially fell from 2-month highs as participants booked profits while large exporters have been pressured with Sony and Toshiba reeling on impairment losses and Mitsubishi Motors shares crashed to a record low on the fuel efficiency scandal, however the index rallied in late trade after reports the BoJ are said to be considering negative rates for its lending programs. ASX 200 (-0.7%) and Shanghai Comp (+0.2%) are lower amid weakness across the commodities complex, although the region's bourses briefly attempted a recovery alongside a rebound in oil, which re-approaches USD 44/bbl and after China conducted a large net weekly liquidity injection of CNY 680b1n. 10yr JGBs are marginally higher amid cautious sentiment in Asia and the BoJ also in the market for around JPY 1.2trl in government debt, while yields in the super-long end were pressured with the 40yr yields printing fresh record lows.
Asian Top News
- Japan Stocks Jump on Report BOJ Considering Support for Banks: yen reverses Thursday’s gain to weaken after the report
- Sony Delays Annual Forecasts to Assess Earthquake Fallout: co. will disclose its outlook for the year in May instead
- As Global Stocks Rally, China’s Markets Send More Ominous Signal: Shanghai Composite is world’s worst performer this week
- From 1MDB Probe, Singapore Charges Former Banker With Laundering: Formal charges among the first to stem from 1MDB probe
- Singapore Raids Brokers; Exchange Reports Irregularities: MAS and CAD probe possible breaches of securities law
- Rajan Seen Getting Extension at India Central Bank in Survey: Rajan’s 3-yr term set to expire early Sept.
- Apple Says ITunes Movies, Book Services Closed Down in China: Closings ordered by Chinese regulator, New York Times reports
European equities have begun the final session of the week on the back foot, with major indices in the red. This follows on from the downside seen across the Atlantic in the US, while equity specific news did little to lift sentiment, with high profile Daimler among the worst performers this morning and Peugeot and Volkswagen also lower as the emissions saga continues to suffocate Co. shares. Despite the downside in equities, Bunds remain relatively unchanged on the day as the German benchmark continues to hover around the 162.50 level after the volatility seen yesterday due to the ECB meeting.
“What we’re seeing today is a bit of profit-taking on the gains we have seen in the past couple of weeks,” said Michael Hewson, a London-based market analyst at CMC Markets Plc. “I’m not convinced we will see it degenerate into a much deeper sell-off in the short to medium term. A lot of pressure that we are seeing in the auto sector is a result of what’s come out of Daimler this morning.”
We certainly wont see it degenerate: after all any time the market turns red, a central bank pops up.
European Top News
- Lloyds Said to Mull Deeper Job Cuts to Combat Low Interest Rates: co. could accelerate program or give fresh plan in summer
- ECB Independence Defended by Policy Makers After German Attacks: Draghi says blaming policy weakens its effectiveness
- Greece Eyes Path to Lifeline as Fiscal Resurrection in Doubt: finance chiefs gather in Amsterdam to assess bailout progress
- Volvo First-Quarter Earnings Fall on North America Truck Market: Volvo’s first-quarter operating profit fell 3%
- Credit Suisse Said to Study Novel Bond Sale to Offload Bank Risk: bank seeking to reduce risk from rogue trading, cybercrime
In currencies, the possibility of another negative interest-rate in Japan weakened the yen, which slumped 0.9 percent versus the dollar. The pound headed for its second weekly gain versus both the dollar and the euro as recent polls suggested a stronger chance of the U.K. voting to remain in the European Union in a June referendum. U.S. President Barack Obama weighed in with an op-ed praising the EU.
The lead driver has been USD/JPY. Gains have been largely based on the JPY perspective, where the run up to the BoJ meeting next week has been given an added 'fillip' as the central bank is said to be considering applying negative rates to its institutional lending program . USD/JPY rallied from sub 110.00 to 110.75, but in the options market, there has been strike buying for much higher levels.
The MSCI Emerging Markets Currency Index fell 0.4 percent, cutting its weekly gain to 0.4 percent. South Korea’s won led declines, losing 0.9 percent followed by a 0.5 percent drop in the Malaysian ringgit. Russia’s ruble rebounded 1.3 percent, after tumbling on Thursday as oil slid. For the week, the Colombian peso climbed 1.9 percent and South Africa’s rand increased 1.4 percent.
In commodities, oil prices have held on to the gains seen yesterday as investor sentiment remains at high levels, with a strong resistance level at USD 44.00/bbl. Gold sold off heavily after reaching the USD 1270/oz level after strength in the USD dampened sentiment. Elsewhere, copper prices were lower alongside yesterday's commodity weakness, but are still on track for its best week in over a month, while Dalian iron ore continued on its recent ascent to print its highest level since September 2014.
On the economic calendar, the lone release of note will be the flash April manufacturing PMI print. Away from the data it’s all about earnings with a number of key reports due out. In total 11 S&P 500 corporates are scheduled to release their latest quarterlies including American Airlines, McDonald’s, General Electric and Caterpillar. Keep an eye on the latter in particular given its gauge as an indicator of global demand.
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Bulletin Headline Summary from RanSquawk and Bloomberg
- European equities trade lower as further emission scandals hamper Auto names and the FTSE falls victim to losses in materials names
- JPY is the main mover in FX markets after BoJ source reports suggesting the central bank will add negative rates to its institutional loan programme
- Looking ahead, highlights include US manufacturing PMI and Canadian CPI as well as comments from ECB's Constancio and Mersch
- Treasuries mostly steady in overnight trading, European and Asian equity markets lower and oil little changed; economic data today offers U.S. manufacturing PMI.
- Chinese speculators have a new obsession: the commodities market. Trading in futures on everything from steel reinforcement bars and hot-rolled coils to cotton and polyvinyl chloride has soared this week, prompting exchanges to boost fees or issue warnings to investors
- China’s benchmark money-market rate climbed the most since June, reflecting tight cash conditions, even as the central bank injected the most funds in almost three months
- Having adopted a negative interest rate on some excess reserves to penalize financial institutions for leaving money idle, the Bank of Japan may consider helping them lend by offering a negative rate on some loans
- Policy makers rallied to defend the European Central Bank’s independence a day after President Mario Draghi hit back at German critics of his monetary strategy as German discontent over the ECB’s ultra-low interest rates erupted this month
- Lloyds Banking Group Plc is considering deeper cuts, beyond its target to eliminate 9,000 jobs by the end of next year, as the Bank of England keeps interest rates at a record low, hurting earnings
- Credit Suisse, seeking to free up capital while immersed in a costly overhaul, is pitching a plan to farm out some of its risk from potential losses on events like rogue trading and cybercrime, people with knowledge of the matter said
- President Barack Obama intervened in Britain’s increasingly bitter Brexit debate Friday, drawing allegations of hypocrisy from lawmakers campaigning for the U.K. to leave the European Union
- Greece faces a new budget confrontation with its international creditors amid fresh German warnings that its long-term success is far from assured and the International Monetary Fund raising questions about the latest economic data
- Representatives of more than 150 nations are due to gather in New York on Friday to sign the Paris climate accord which calls for voluntary reductions of fossil-fuel emissions in hopes of limiting global warming
- Sovereign 10Y bond yields mixed; European, Asian equity markets mostly lower; U.S. equity-index futures mixed. WTI crude oil, metals mostly higher
US Event Calendar
- 9:45am: Markit US Manufacturing PMI, April P, est. 52 (prior 51.5)
DB's Jim Reid concludes the overnight wrap
Turning to markets this morning, it’s looking like the bulk of bourses in Asia are set to end the week softer. The Hang Seng (-0.95%) has seen the steepest fall this morning, while the Shanghai Comp (-0.59%), Kospi (-0.47%) and ASX (-0.42%) are all in the red and following the lead from the US yesterday. The Nikkei (+0.91%) has quickly more than reversed losses in the last 20 minutes or so with Bloomberg headlines coming through suggesting that the BoJ is to possibly support banks. Oil has recouped about half of yesterday’s decline, while base metals are a little more mixed. Iron ore futures are also up, while yesterday we saw the commodity rally another 9%, taking the WTD gain to nearly 21% with the commodity trading now above $70/tn and to the highest since January last year.The early data this morning meanwhile was out of Japan where the flash manufacturing PMI for April was reported as declining a disappointing 1.1pts to 48.0 (vs. 49.5 expected). As we'll see in the day ahead the other global flash PMIs are today's highlight. In China the MNI business indicator for this month was reported as rising 0.6pts to 50.5, the first reading above 50 since January.US equity index futures are also in the red this morning which is partly reflecting some earnings reports out after the close last night. Google’s parent company Alphabet posted earnings well below expectations last night (EPS of $7.50 vs. $7.96 expected) after a big fall in online advertising (or cost per click). It’s worth noting that unlike the banks, street earnings expectations for Alphabet have been relatively consistent all year. Meanwhile Microsoft also came out with slightly disappointing earnings of its own, marginally missing analyst expectations. The end result was for Alphabet shares to trade as much as 7% lower in extended trading, while Microsoft slid 5% also after the closing bell.
Prior to this markets had also reacted negatively to Verizon’s latest quarterly report which weighed on the rest of the telecoms sector. Despite earnings matching expectations for Q1, it was the weak read-through to the next quarter as a result of the ongoing worker strike. We are starting to see critical mass in earnings season now with 119 S&P 500 companies having reported. The early going is positive with an impressive 82% exceeding earnings expectations and 59% exceeding revenue estimates. As we’ve highlighted though the benchmark is clearly a lot lower for this reporting period having seen expectations revised down in recent weeks. We’ll be taking a closer look at this trend next week following some of the bigger reports today.
With regards to the macro, all in all yesterday’s economic data was a bit of a mixed bag. On the positive side, the latest initial jobless claims print showed claims fell another 6k last week to 247k (vs. 265k expected) and marking a new fresh low since 1973. It’s hard to imagine anything other than a positive read-through to the April payrolls number. On the flipside, the Philly Fed manufacturing survey was disappointing after falling 14pts to -1.6 (vs. +9.0 expected). That puts the index back near where it was in January and February this year after last month’s spike higher. Meanwhile the Conference Board’s leading indicator rose slightly less than expected last month at +0.2% mom (vs. +0.4% expected). Finally the FHFA house price index printed in line for February at +0.4% mom.
Over in Europe and away from the ECB focus, retail sales data out of the UK disappointed in March. Excluding auto fuel, sales were down a sharper than expected -1.6% mom (vs. -0.3% expected) while including fuel sales were also down heavily (-1.3% mom vs. -0.1% expected). Meanwhile, in the afternoon we saw a modest improvement in the Euro area consumer confidence reading to -9.3 for this month, an improvement of 0.4pts.
Looking at the day ahead, this morning in Europe the big focus will be on the release of the flash April manufacturing, services and composite PMI’s for the Euro area, Germany and France which are expected to point towards a very modest improvement. Over in the US this afternoon the lone release of note will be the flash April manufacturing PMI print. Away from the data it’s all about earnings with a number of key reports due out. In total 11 S&P 500 corporates are scheduled to release their latest quarterlies including American Airlines, McDonald’s, General Electric and Caterpillar. Keep an eye on the latter in particular given its gauge as an indicator of global demand.