One day after markets saw a violent return of optimism, which sent stocks around the globe and US equity futures soaring (the US was closed for President's Day) driven by terrible Japanese and Chinese economic data which in turn hinted at more central bank easing, animal spirits have cooled off despite some truly unprecedented Chinese credit numbers.
As we showed last night, in January Chinese bank loans soared by CNY2.5 trillion, far above the CNY1.9 trillion expected, but it was the largest debt aggregate, the TSF which soared by a record CNY3.4 trillion, or $52 billion, more than 50% higher than expected, suggesting it was not only Japan which had panicked at the end of January with NIRP - China was literally flooding its economy with debt to stimulate growth.
We doubt it will work, as increasingly more companies are now beyond the Minsky tipping point where they have to issue debt just to pay interest. With China debt/GDP already at a world (ex Japan) record 350%, it is only a matter of time before China suffers a dramatic event, one which reprices its $35 trillion in bank "assets" substantially lower.
And while S&P500 futures appeared close to breaching above the 1900 level overnight following another strong Asian session where the SHCOMP surged 3.3% on record Chinese loan data, Europe crippled the rally, for now, and despite a positive start which sold European stocks up 0.8%, sold off heading into mid-morning amid risk off sentiment (Euro Stoxx: -0.32%). This has stemmed from the weakness in financials with concerns surrounding the health of banking sector still not abated entirely. At last check Deutsche Bank stock was down nearly 5%.
Also, the market had clearly been waiting for good news from the "secret" Saudi-Russian oil summit. As reported previously, it did not get the news, and instead it got the opposite, when the two oil superpowers agreed to freeze production at record high levels. As a result WTI has slid back under $30 after nearly hitting $31 in the kneejerk reaction to the news.
"Markets need more than just a freeze in oil production, they need a cut,” said Ralf Zimmermann, a strategist at Bankhaus Lampe in Dusseldorf. “People are looking at policy makers, be it central banks or OPEC, for more reassurance because everything boils down to what will happen to global growth."
And that is indeed the bottom line, because even with China pumping out record amounts of debt to restart both domestic and local growth in what is increasingly a sign of desperation, growth just refuses to emerge.
Where global markets stand now
- S&P 500 futures up 1.1% to 1880
- Stoxx 600 down 0.7% to 320
- FTSE 100 down 0.2% to 5815
- DAX down 0.8% to 9134
- German 10Yr yield up 1bp to 0.25%
- Italian 10Yr yield up 1bp to 1.61%
- Spanish 10Yr yield up 4bps to 1.74%
- MSCI Asia Pacific up 1% to 119
- Nikkei 225 up 0.2% to 16054
- Hang Seng up 1.1% to 19122
- Shanghai Composite up 3.3% to 2837
- US 10-yr yield up less than 1bp to 1.76%
- Dollar Index up 0.55% to 96.47
- WTI Crude futures up 1% to $29.73
- Brent Futures up 1.6% to $33.91
- Gold spot up 0.2% to $1,211
- Silver spot down less than 0.1% to $15.32
Top Global News
- Saudi Arabia and Russia Agree Oil-Output Freeze in Qatar Talks: Ministers from Qatar, Venezuela also agreed to freeze; WTI Near $30 After Producers Agree Output Freeze
- Vodafone, Liberty Global to Combine Dutch Mobile-Phone Business: Deal to create cost, revenue synergies of ~$3.9b
- China Said to Weigh Cutting Minimum Bad-Loan Coverage Ratio: Some big banks said to have already used ratio of ~120% for their 2016 budgeting
- Supreme Court Vacancy Opens Up Partisan Chasm Over Senate’s Role: Clinton, Sanders both say an Obama nominee deserves a vote
- Berkshire Hathaway Buys 1.08m Shares of Phillips 66: Holds 75.6m shares after this week’s purchases
- Pershing, Berkshire among those to file as 13F deadline approaches: Hedge fund also adds to stake in Alphabet, which owns Google
- ‘Deadpool’ Delivers New Marvel Success to Fox With Record Debut: $135 million tally tops ‘Fifty Shades’ to set February record
- Apollo Said to Near Acquisition of Security Firm ADT, WSJ Says: PE firm to announce deal as soon as Tuesday
- Mondelez Cheese, Grocery Unit Up for Sale Next Month, Sunday Times Says: To go up for sale next month as part of $3b asset selloff
- Boeing Near Decision to Self-Fund More F/A-18 Fighters: Reuters: Awaiting U.S. govt decision on order for 28 fighter jets from Kuwait
- Daimler to Cut Over 1,200 Jobs at North Carolina Plants, WSJ Says: Truck unit layoffs to take effect Friday
We start our global equity round up as usual in Asia, where equity markets extended on yesterday's gains after quiet global newsflow and an energy resurgence kept sentiment upbeat. Nikkei 225 (+0.2%) extended on Monday's stellar performance, led by Telecoms after index heavyweight Softbank hit limit on an announcement of a JPY 500bIn share repurchase. Shanghai Comp (+2.5%) outperformed underpinned by record high financing and lending data, while energy names boosted the Hang Seng (+1.7%) after crude gained over 4% ahead of Russia-OPEC talks scheduled today. 10yr JGBs advanced despite the positive risk sentiment in stocks, supported by a well-received 20yr auction in while the BoJ are also expected to enter the market tomorrow.
As noted above, China's January credit creation was simply stunning, with Chinese New Yuan Loans CNY Y/Y 2510.0B vs. Exp. 1900.0B (Prey. 597.8B); highest on record; Aggregate Financing CNY Y/Y 3420.0B vs. Exp. 2200.0B (Prey. 1820.0B); highest on record; leading to a surge in Money Supply M2 Y/Y 14.00% vs. Exp. 13.50% (Prey. 13.30%)
Top Asian News
- Chinese Premier Faults Regulators’ Handling of Stocks, Yuan Rout: Regulators didn’t respond actively to declines, some even have management problems
- Mobius Says China’s Irrational Stock Market Is Creating Bargains: Hang Seng China Enterprises Index plunged 49% from May high through last week
- China Said to Plan 400 Billion Yuan in Special Building Projects: Chief planning agency backs infrastructure projects to spur growth
- SoftBank Adds $7.3 Billion After Announcing Record Buyback Plan
- India Asks Vodafone to Pay Taxes or It May Face Asset Seizures: Vodafone should pay $2.1b tax bill, according to a letter sent to company
- Sharp Board Said to Be Split as Talks Continue on Rival Offers: Foxconn, INCJ have each won support of at least 4 of Sharp’s 13 directors
In Europe, despite a positive start sold off heading into mid-morning amid risk off sentiment (Euro Stoxx: -0.32%). This has stemmed from the weakness in financials with concerns surrounding the health of banking sector still not abated entirely. Additionally, the energy complex has somewhat pulled off best levels following comments by the Qatari energy minister stating that an agreement has been made by Saudi, Qatar, Russia and Venezuela to hold output at January levels, however this is contingent on other major producers also agreeing. Downside was seen in the energy complex in the wake of this news given that January levels of OPEC oil production was 33m1n bpd, a record high, while some participants had been hoping for a cut from oil producing nations. The news was also interpreted negatively due to the deal being contingent on other major producers also agreeing, given that the likes of Iran were not present at the meeting. In turn, the risk-off sentiment also saw Bunds come off their worst levels while notable curve steepening has been observed.
Top European News
- EDF Cuts Payout as It Sees Lower Power Prices Cutting Profit: Revenue to be ‘severely hit’ toward 2017-2018 by market drop
- Airbus Raises 2015 Tally; Order Backlog Value Tops $1 Trillion: Now includes additional net 44 aircraft to last year’s order book
- Anglo American to Exit Kumba Unit in Move Away From Iron Ore: Options for disposal include a spinoff of its 69.7% stake
- VW Loses European Market Share to Fiat in Wake of Scandal: VW brand drops 4% as overall European car demand jumps 6.3%
- Orange Says Bouygues Deal Needs More Time Amid Talks With Rivals: Talks for acquisition of smaller competitor to take weeks
In commodities, Brent for April settlement advanced as much as $2.16 to $35.55 a barrel before paring the gains. West Texas Intermediate rose 1 percent to $29.74 a barrel on the New York Mercantile Exchange. More than a year since the Organization of Petroleum Exporting Countries decided not to cut production to boost prices, oil remains about 70 percent below its 2014 peak. Supply still exceeds demand and record global oil stockpiles continue to swell, potentially pushing prices below $20 a barrel before the rout is over, Goldman Sachs Group Inc. said last week.
Qatar energy minister states an agreement has been made between Saudi Arabia, Russia, Venezuela and Qatar to hold output at January levels, however this is contingent on other major producers also agreeing. Of note, OPEC January production levels, were at a record high, while some participants had been hoping for a cut from oil production nations.
According to a senior source familiar with Iranian thinking, Iran would be willing to discuss over an oil output freeze once its production has reached pre-sanction levels. Of note, this is very similar to the recent rhetoric from Iran, consequently hinting that a cut in oil production is becoming increasingly unlikely.
Gold rose 0.4 percent in the spot market as demand for haven assets rebounded.
In FX, the yen advanced against all 16 of its major peers, climbing most versus the South Korean won and New Zealand dollar. It gained 0.5 percent to 127.19 per euro. The 19-member common currency strengthened 0.2 percent to $1.1177.
South Korea’s won dropped 0.7 percent to a two-week low as the central bank’s decision to keep the benchmark interest rate at a record-low 1.5 percent failed to quell speculation about a rate cut. Malaysia’s ringgit slid 0.6 percent, while Russia’s ruble slipped 0.5 percent. A gauge of emerging-market currencies lost 0.2 percent, halting two days of gains.
The yuan traded in the mainland weakened 0.3 percent a day after climbing the most in more than a decade, according to China Foreign Exchange Trade System prices. The currency surged on Monday as it caught up with declines in the greenback last week, when Chinese markets were shut for the Lunar New Year holidays. The People’s Bank of China set its daily reference rate little changed at 6.5130.
On today's calendar in the US we get the February Empire manufacturing print, followed later by this month’s NAHB housing market index reading. Fedspeak wise we’re due to hear from Harker (at 2pm GMT) who is due to deliver his 2016 economic forecast, followed later on by comments from the new Minneapolis Fed President Kashkari (at 3.30pm GMT). Earnings wise we’ve got 14 S&P 500 companies set to report.
Bulletin Headline Summary
- European equities shrug off the positive lead from Asian bourses as concerns continue surround the health of financial names.
- Risk sentiment also dampened as Saudi Arabia, Qatar, Russia and Venezuela agree to freeze oil output at January levels, subsequently disappointing calls for an output cut.
- Going forward participants will be looking out for US Empire Manufacturing and comments from Fed's Harker (Non-voter, Soft Dove) Kashkari (Non-voter-N/A) and Fed's Rosengren (Voter, Dove)
- Treasury yield curve steeper as European equity markets mostly lower, oil rallies in overnight trading.
- Saudi Arabia and Russia, the world’s two largest crude producers, agreed to freeze output after talks in Qatar. The freeze is conditional on other nation’s agreeing to participate, Russia’s Energy Ministry said in a statement
- China’s broadest measure of new credit surged to a record as a seasonal lending binge coincided with a recovery in property prices. Aggregate financing rose to 3.42 trillion yuan ($525 billion) in January, according to a report from the PBOC
- China’s cabinet has discussed lowering the ratio of provisions banks must set aside for bad loans, potentially easing a drag on earnings after soured debts at lenders climbed to the highest in a decade
- The BOJ on Tuesday started charging 0.1% on a portion of the excess funds that financial institutions have in accounts at the central bank. The negative interest rate would have applied to ¥23.2 trillion ($203 billion) if the policy had been in place last month, the bank estimated
- With the ECB president set to give his next policy announcement on March 10, traders are positioned for a monetary-easing bonanza judging from the pace at which euro- region bond yields are dropping to new lows
- German investor confidence fell to its lowest level since October 2014 as equities plummeted amid slowing Chinese growth and concern over the profitability of euro-area lenders
- Prime Minister David Cameron takes his case for an overhaul of the terms of Britain’s membership of the European Union to Brussels Tuesday as the French government digs in its heels over aspects of his reform agenda
- U.K. inflation climbed to its highest in a year in January, driven by motor fuels, food and clothing. Consumer prices rose an annual 0.3% and core inflation slowed to 1.2%
- No IG corporates priced Friday, $1b priced on the week (YTD volume $182.575b) and no HY priced Friday, nothing priced on the week (YTD volume $9.275b)Sovereign 10Y bond yields mixed; European stocks mostly lower, Asian markets rise; U.S. equity-index futures higher. Crude oil, copper and gold rally
US Event Calendar
- 8:30am: Empire Manufacturing, Feb., est. -10.5 (prior -19.37)
- 10:00am: NAHB Housing Market Index, Feb., est. 60 (prior 60)
- 11:30am: U.S. to sell $37b 3M, $30b 6M bills
- 4:00pm: Total Net TIC Flows, Dec. (prior -$3.2b)
- Net Long-term TIC Flows, Dec. (prior $31.4b)
- TBA: Mortgage Delinquencies, 4Q (prior 4.99%)
- MBA Mortgage Foreclosures, 4Q (prior 1.88%)
Central Banks
- 8:30am: Fed’s Harker speaks in Newark, Del.
- 10:30am: Fed’s Kashkari speaks in Washington
- 7:00pm: Fed’s Rosengren speaks in Waterville, Maine
DB's Jim Reid concludes the overnight event wrap
A fresh wave of optimism has swept through markets to start this week and it’s taken a double dose of soothing Central Bank rhetoric, along with further gains for Oil to get risk assets off to a flyer. With regards to the former and following on from PBoC Governor Zhou’s calming comments concerning China’s FX policy over the weekend, it was the turn of ECB President Draghi to weigh in with some reassuring comments of his own yesterday after speaking to European Parliament lawmakers.
Specifically, it was the ‘we will not hesitate to act’ comment which had markets and investors excited. Draghi referred to this in light of two key topics at the moment, that being the banking sector, and low energy prices and the associated read-through to inflation expectations. With regards to the latter, Draghi highlighted that at the March policy meeting ‘we will examine the strength of the pass-through of low imported inflation to domestic wage and price formation and to inflation expectations’. This was mentioned in conjunction to comments around Banks, saying that ‘in light of the recent financial turmoil, we will analyze the state of transmission of our monetary policy impulses by the financial system and in particular by banks’. Draghi concluded that if ‘either of these two factors entail downward risks to price stability’, then the ECB will not hesitate to act.
Perhaps unsurprisingly Draghi also made further comments aimed at dampening the recent concerns reverberating around European banks. The ECB President acknowledged that ‘the fall in bank equity prices was amplified by perceptions that banks may have to do more to adjust their business models to the lower growth/lower interest-rate environment and to the strengthened international regulatory framework that has been put in place since the crisis’. However, this was also followed up with the need to acknowledge that ‘the regulatory overhaul since the start of the crisis has laid the foundations for durably increasing the resilience not only of individual institutions but also of the financial system as a whole’ and that ‘perhaps most importantly, euro area banks have significantly strengthened their capital positions over the past few years’.
Bourses in Asia and specifically Japan held onto those big gains after we went to print yesterday, with the Topix (+8.02%) eventually closing up by the most since 2008. European equity markets started strongly and traded with a positive tone throughout. The end result was a sharp leg up for the Stoxx 600, eventually closing +2.99% and just outdoing the +2.91% gain made on Friday, with other core and peripheral bourses up similar amounts.
This morning in particular it’s been all about Oil with the complex extending gains which started on Friday, this time as headlines dominate the wires that Saudi Arabia, Qatar, Venezuela and Russia Oil Ministers are set to meet today in Doha. While the agenda is being kept private, the hope is that this could be a positive step forward for potential coordinated action around lower production levels for Opec and non-Opec members. In any case we’ve seen WTI rise +4.38% this morning and back towards $31/bbl, after being as low as $26 just last Thursday. Brent is up +3.89% to $34.69/bbl. One to keep an eye on as the day progresses.
Meanwhile there’s also been some China data for us to digest this morning. Aggregate financing in January has printed well above expectations at 3.42bn Yuan (vs. 2.2bn expected). Money supply growth has also strengthened, with M2 growth in particular +14.0% yoy (vs. +13.5% expected), having been at +13.3% in December. While on face value this would indicate some easing in credit conditions, seasonality may also be playing its part at this time of year.
This, combined with Draghi’s comments has helped markets in Asia build upon their strong start to the week. The Nikkei and Topix are currently up +0.72% and +0.90% respectively, while the Hang Seng (+1.33%), ASX (+1.37%) and Kospi (+1.40%) are also firmer. Its bourses in China which are leading gains however with the Shanghai Comp and CSI 300 currently +2.75% and +2.70% respectively. US equity market futures are up around half a percent while credit indices in Australia and Asia are both tighter. Meanwhile the onshore CNY has given up a little bit of yesterday’s strengthening, with the currency currently -0.28% weaker in early trading.
Wrapping up the price action yesterday. Along with the strong gains for equities, European credit markets extended the rally for a second day, led once again by moves for financials indices. ITraxx senior and sub fins closed 4.5bps and 13bps tighter respectively which helped Main (-3.5bps) and Crossover (-13.5bps) tighten further. The better tone for risk saw Gold tumble -2.32% yesterday and is down another 1% this morning which has taken it back below $1200. Other precious metals are also weaker while base metals were a bit more mixed yesterday.
Looking at today’s calendar, this morning in Europe the main data of note will firstly be the UK CPI/RPI/PPI docket for January, followed closely by the February German ZEW survey where current expectations are for a marked decline in both the current situation and expectations component. In the US this afternoon the February Empire manufacturing print is due, followed later by this month’s NAHB housing market index reading. Fedspeak wise we’re due to hear from Harker (at 2pm GMT) who is due to deliver his 2016 economic forecast, followed later on by comments from the new Minneapolis Fed President Kashkari (at 3.30pm GMT). Earnings wise we’ve got 14 S&P 500 companies set to report.