With markets happy to put February in the history books because it marked the fourth consecutive monthly decline in global stocks, we move on to March 1st, which doubles down as 'Super Tuesday' in the US when Trump's presidential candidacy will almost certainly be sealed and a day in which stocks decided to join the super fun by super surging overnight on nothing but bad global macro and economic which however was promptly ignored and instead the focus was on ongoing central bank intervention and even more jawboning.
As Bloomberg puts it "global stocks rallied, emerging-market currencies rose and crude oil climbed after investors across Asia responded favorably to stimulus in China" which is odd because the stimulus was announced over the weekend and stocks tumbled on Monday.
There were three key overnight news events:
1) the February plunge in China's PMI, which missed expectations and where the manufacturing index dropped to a 7 year low, while the service tumbled to the lowest level since 2008:
2) the collapse in Glencore's full year 2015 earnings, which just reported its worst year since going public, as net income plunged 69% to $1.34 billion, and the firm suffered an adjusted loss in its mining division, while announcing plans it will sell another $5 billion in assets.
3) the collapsing earnings and dividend cut by UK's Barclays, whose pretax earnings plunged 56%, sending the stock tumbling by 10%, the biggest crash since June 2012, on the bank's deteriorating outlook, the sale of its 62% stake in Barclays Africa, and cutting of the Barclays dividend.
On the surface, one would think that these are not exactly "good" developments and would not lead to a surge in overnight futures, and yet surge is precisely what global markets and US equity futures have done. What sparked the rebound? Well, the Shanghai Composite was largely unchanged for the day when shortly after midnight Eastern, US Treasury Secretary Jack Lew hit the tape when he spoke in briefing in Hong Kong after meeting Chinese officials in Beijing. And this is what unleashed the rally: Lew said that "China assured him it had no need or plans to devalue currency."
This of course, came one day after China engaged in the biggest currency devaluation in 8 weeks after the conclusion of the G-20 meeting.
The rest of the jawboning from Lew:
- China’s policy makers gave commitment on reforms, rebalancing economy
- Discussed need to improve communications
- Says global economy faces headwinds, needs more demand
- Lew said U.S. real economy continues to do pretty well
Was this the reason for the buying? Of course not, but it provided a handy cover for the BOJ's latest round of overnight USDJPY intervention which took the paid higher by 100 pips overnight, and since the markets make the news, why not ascribe the "buying catalyst" to Jack.
Elsewhere, European equities headed for a fourth day of gains for the first time since October as investors assessed earnings reports and deal activity. Russia’s ruble and South Africa’s rand led an advance among major currencies and the yuan strengthened for the first time in eight days after the People’s Bank of China cut lenders’ reserve requirements, freeing up funds to help spur lending. Germany’s bonds declined as nickel led gains in industrial metals prices and crude rose in New York. The cost of insuring corporate junk bonds in Europe fell for the fourth day, the longest run this year.
Where markets stand right now
- S&P 500 futures up 0.8% to 1946
- Stoxx 600 up 1% to 337
- MSCI Asia Pacific up 0.7% to 120
- US 10-yr yield up 2bps to 1.75%
- Dollar Index up 0.06% to 98.27
- WTI Crude futures up 1.5% to $34.25
- Brent Futures up 1% to $36.93
- Gold spot up 0.1% to $1,240
- Silver spot down less than 0.1% to $14.90
Top Global News:
- ICE Confirms It May Bid for LSE Group, Sending Shares to Record: Intercontinental Exchange said to work with Morgan Stanley, sees room to outbid German rival Deutsche Boerse despite risk.
- Trump, Clinton Hope Super Tuesday Tightens Grip on Nomination: The two front-runners are expected to begin pulling away from their rivals when Tuesday’s results are tallied
- Valeant Says It’s Under Investigation by SEC, Shares Plunge: Received a subpoena from the SEC in the fourth quarter and would have disclosed it in due course in its 10-K filing, which has been delayed
- Peabody Energy Says It Has Held Talks With First Lien Lender: talks on its secured credit agreement regarding proposed bond exchanges and other issues, as plummeting coal prices spark an increase in debt defaults among U.S. coal companies
- Apple Goes to Washington With Some Wind in Its Sails: Judge calls U.S. demand for help cracking iPhone ‘absurd’
- Marathon Seeks $1.3 Billion in Stock Sale to Weather Rout: Sale would increase shares outstanding by about 20%. Morgan Stanley is acting as the book-running manager
- BlackRock, Citi Say Buy Munis as Yields Climb From 50-Year Low: Increase in supply means a chance to lock-in higher yields. ‘Cheapness could be relatively short-lived,’ Citi’s Rai says
- Exxon’s $12 Billion Bond Deal Doesn’t Make 2016 Any Sweeter: Signs that demand for U.S. corporate bonds is waning. Total issuance down about 3% from first 2 months of 2015
Looking at regional markets, we start in Asia where stocks initially traded mixed with choppy price action seen overnight as the region digested the surprise PBoC measures coupled with further weak Chinese data. Nikkei 225 (+0.4%) initially underperformed on JPY strength with declines to company profits and capital spending figures adding to the dampened tone. However, the index then recovered alongside a mild reversal in the currency. ASX 200 (+0.9%) was underpinned by commodity sector strength, while the Shanghai Comp (+1.7%) fluctuated between gains and losses as the PBoC 50bps RRR cut was counterbalanced by weak data in which Official and Caixin manufacturing PM's missed expectations to post a 7th month and 5th month in contraction territory respectively. 10yr JGBs traded flat despite weakness in Japanese equity markets and a weak 10yr JGB auction. As noted previously, Chinese Official Manufacturing PMI (Feb) M/M 49.0 vs. Exp. 49.4 (Prey. 49.4); 7th month of contraction & lowest since 2011.
Top Asian News
- China’s PMI Reports Show Slowdown Deepening as Services Slip: Factory gauge hasn’t been at a weaker level for 7 yrs; services index slips to lowest since Dec. 2008
- Japan Gets Paid to Borrow for 10 Years as Auction Yield Negative: ‘Ten-year yields have overheated,’ Barclays strategists say
- Macau Casino Revenue Downturn Eases on Festive Fillip: Feb. decline smallest on record amid 21-month slump as operators turn more to mass market to offset VIPs
- Templeton’s Man in China Predicts 20% Stock Rally as Panic Fades: Xu says worst is over after panicked investors caused the world’s deepest selloff
- Sharp Faces Cash Squeeze as Foxconn Takeover Talks Drag On: Sharp has 510b yen ($4.5b) in credit lines and loans that are set to expire on March 31
European equities saw a move higher shortly after the open to see Euro Stoxx reside firmly in the green (+1.1%), with much of the strength coming in the wake of stock specific news. LSE (+7.5%) is among the best performers after news that ICE (ICE) are to rival Deutsche Boerse's bid, while BMW (+3.9%) are also among the best performers after some upbeat comments from the Co. at the Geneva motor show, which have helped support the DAX as the index future outperforms after breaking above the resistance level at 9600. Elsewhere, UK large cap Barclays (-11.0%) is among the worst performers after their pre-market earnings, with financials the softest sector in Europe.
In tandem with the upside in equities, fixed income has come under pressure so far today with Bunds back below 166.50, trading lower by around 50 ticks by the North American crossover. The downside in Bunds shortly after the European equity cash open was attributed by some desks to high volume, in the form of 5000 lots being traded in under a 1 minute period. However more generally, the pressure on the German benchmark also comes as a result of sovereign hedging amid deals from Finland and Belgium, combined with a reversal from yesterday's month end-inspired moves.
Top European News
- Barclays to Reduce Africa Stake, Cut Dividend in Revamp Plan: Will sell down its 62% stake in Barclays Africa over the next 2 to 3 years to a level that allows it to deconsolidate the business; FY adj. pretax, including restructuring costs, fell 56% to GBP247m, missed GBP519m est.; cut its dividend to 3p/shr for 2016 and 2017, from 6.5p last year
- Glencore Posts Biggest Profit Drop Since IPO on Metals Slump: 2015 net income ex- some items down 69% to $1.34b as prices for metals and oil collapsed, to sell as much as $5b in assets
- Gameloft, Ubisoft Shares Jump on Vivendi’s Renewed Deal Push: Vivendi plans a tender offer for Gameloft shares at EU7.20 each, vs original EU6; also raised its stake in Ubisoft above 15%, said plans to keep buying shares, seek board representation
- Euro-Area Unemployment Drops to 4-Year Low Amid Stimulus Debate: Region’s Jan. jobless rate declined to 10.3%, lowest since Aug. 2011, beat median forecast of 10.4%
- U.K. Manufacturing Has Its Worst Month in Almost Three Years: Markit Economics said its factory index dropped to 50.8 from 52.9, marking the weakest reading since April 2013
- Handelsbanken Falls After Regulator Raises Capital Requirements: Swedish regulator ordered lenders in the country to increase corporate risk weights by “at least a few percentage points”
- Fiat Makes Biggest Europe Push in Decade to Rescue 2018 Strategy: Showing 10 new models at Geneva Motor Show this week
In currencies, the yen dropped against 31 major peers, falling from strongest level in almost three years against the euro. It declined 0.5 percent to 113.22 per dollar and slipped 0.4 percent to 122.96 per euro.
Russia’s ruble rose 2 percent versus the dollar and Malaysia’s ringgit strengthened 0.7 percent as the rebound in crude prices brightened prospects for the oil-exporting nations. South Africa’s rand jumped 1 percent as data showed foreign investors on Monday pumped the most money into the nation’s stock market since 2009. A Bloomberg gauge of 20 developing-nation currencies rose 0.5 percent, extending Monday’s advance. The measure increased 0.3 percent in February after falling 5.1 percent over the previous three months
In commodities, oil climbed from the highest close in more than seven weeks following the first monthly decline in production from the Organization of Petroleum Exporting Countries since November. West Texas Intermediate rose as much as 1.7 percent to $34.32 a barrel. Iraq’s production dropped by 125,000 barrels a day to 4.385 million after the pipeline exporting crude from the northern part of the country was halted, according to a Bloomberg survey of oil companies, producers and analysts. Saudi Arabian output was unchanged at 10.2 million barrels a day.
U.S. natural gas futures fell 0.3 percent to $1.706 per million British thermal units, extending the biggest monthly drop since 2014 on mild weather and record inventories of the heating fuel.
Nickel led gains in industrial metals, rising 0.9 percent to $8,600 a metric ton. Aluminum added 0.6 percent while copper climbed 0.4 percent.
In today's US calendar, all eyes will be on the US ISM manufacturing data while vehicle sales (expected: 17.70m), construction spending (expected: 0.3%), IBD/TIPP economic optimism data (expected: 47.9) and the manufacturing PMI (expected 51.2) are also due.
Bulletin Headline Summary from RanSquawk and Bloomberg
- European equities followed on from their Asian counterparts to trade in positive territory, despite underperformance in financials
- JPY and GBP have been among the more notable FX movers this morning, with risk off sentiment sending USD/JPY higher, with GBP also heading upwards this morning towards 1.4000
- Today's highlights include US ISM manufacturing, manufacturing PMI and construction spending, Canadian GDP, API Inventories, Fonterra GDT Auction and comments from ECB's Lautenschlaeger
- Treasuries lower in overnight trading as global equity markets and commodities rally, spurred by China’s announced cut to banks’ required reserves; today’s economic data includes ISM and vehicle sales.
- China’s benchmark money-market rate declined the most in more than three weeks after the central bank reduced the amount of deposits that lenders must set aside in reserve; will inject about 685 billion yuan ($105 billion) into the financial system
- China’s factory gauge extended its stretch of deteriorating conditions to a record seven months while a measure of services fell to the weakest in seven years
- The Japanese government got paid to borrow money for a decade for the first time, selling ¥2.2 trillion ($19.5 billion) of the debt at an average yield of negative 0.024% on Tuesday
- Euro-area unemployment decreased to lowest in more than four years in January, giving European Central Bank policy makers some positive news a week before their monetary policy meeting
- Euro-area factories cut prices at the fastest pace in almost three years in February as Markit Economics said the price gauge of its manufacturing Purchasing Managers Index fell further below the key 50 level, to the lowest since June 2013
- Barclays Plc fell the most in more than three years in London trading amid investor concern that the bank’s profit outlook is weakening as the firm slashed its dividend
- U.K. manufacturing grew the least in almost three years in February and new orders barely rose, highlighting the fragility of the economy as it heads into an uncertain year
- Greece’s creditors hit a roadblock over the conditions for disbursing the next portion of emergency loans to Europe’s most indebted state, as PM Tsipras pointed the finger at the IMF for yet another delay in the review of the country’s bailout
- Donald Trump and Hillary Clinton hope to use a pair of dominant Super Tuesday performances to all but cement a White House match-up this fall, as roughly a quarter of the nation votes in the biggest day so far in the 2016 campaign
- $17.4b IG corporates priced yesterday, MTD volume $124.9b, YTD $294.25b
- BofAML Corporate Master Index OAS 6bp lower yesterday at +205, +3bp MTD, +32bp YTD; T1Y range 221/129
- BofAML High Yield Master II OAS 5bp lower yesterday at +775, -2bp MTD, +80bp YTD; T1Y range 887/438
- Sovereign 10Y bond yields mostly steady; European, Asian markets rise; U.S. equity- index futures higher. Crude oil rallies, copper, gold higher
US Event Calendar
- 9:45am: Markit US Manufacturing PMI, Feb F, est. 51.2 (prior 51)
- 10:00am: IBD/TIPP Economic Optimism, March, est. 47.9 (prior 47.8)
- 10:00am: ISM Manufacturing, Feb., est. 48.5 (prior 48.2)
- ISM Prices Paid, Feb., est. 35 (prior 33.5)
- ISM New Orders, Feb. (prior 51.5)
- 10:00am: Construction Spending m/m, Jan., est. 0.3% (prior 0.1%)
- TBA: Wards Domestic Vehicle Sales, Feb., est. 13.83m (prior 13.79m)
- Wards Total Vehicle Sales, Feb., est. 17.7m (prior 17.46m)
DB's Jim Reid concludes the overnight wrap
We'll dive straight into the Asian numbers starting with a disappointing PMI report from China overnight. The Manufacturing PMI series came in at 49.0 in February which is sequentially weaker than the 49.4 we saw in January and at 7 year lows. The market consensus was for an unchanged print of 49.4 in February. In terms of the details, new orders and the employment sub-series also slipped. There was some chatter that the Chinese New Year holidays helped keep the number weak but on the flip side this should have helped services. On this non-manufacturing PMI also came in sequentially weaker in February at 52.7 vs 53.5 (lowest since 2008) but at least it remains in expansionary territory even if new orders, selling prices, employment, backlog and inventories were worryingly below 50. The Caixin China PMI Manufacturing series also came out slightly below consensus overnight at 48.0 (est 48.4). Turning to Japan we saw the final Nikkei Japan PMI Manufacturing come in at 50.1 which is also a drop from January’s 52.3 reading.
Markets in Asia are mixed after the numbers. The Shanghai Comp is -0.68% as we go to print but many other EM equities are higher. The Hang Seng is broadly flat with the Nikkei -0.26%. One unprecedented move overnight has been that Japan has priced a 10yr government debt auction at a negative average yield for the first time. It drew an average yield of minus 0.024%. Also overnight FRB of NY President Dudley (whilst in China) has said his confidence in the Fed hitting its 2% inflation target over time has slipped and that he has edged down his growth expectations.
Back to the PMIs, the key release today will be the US manufacturing ISM. Although it's expected to edge up from 48.2 to 48.5, this will still mark the 5th successive sub-50 print. Whilst manufacturing makes up only around 10% of the US economy, Joe LaVorgna points out that it is highly cyclical and is normally predictive of wider economic trends. The correlation between this number and annual real US GDP is 0.7 since 1948. At the moment none of us truly know whether there can be decoupling. With low energy prices, if there was ever a time where there could be some decoupling then this would be it. Thursday's services ISM will give us a fuller picture though so it's an important week before we even get to Friday's payrolls.
Related to the PMIs, US data wasn't great yesterday after a good recent run. The ISM Milwaukee survey was the only bright spot, as it rose to 55.2 in February (vs. 50 expected; 50.36 prior). However, many of the more closely watched indicators definitely threw up some red flags. The recently very volatile Chicago Area PMI fell more than expected to 47.6 (vs. 52.5 expected; 55.6 prior), one again raising concerns regarding the US manufacturing sector. Adding to these concerns, the Dallas Fed Texas Manufacturing outlook also disappointed (-31.8 vs. -30.0 expected; -34.6 prior) despite showcasing some improvement. Pending Home sales data was also a major red flag, as the index fell by -2.5% mom (vs. +0.5% expected; +0.1% prior) in January. This was the biggest drop since December 2013, with sales dropping in 3 out of 4 regions included in the index.
However China's latest easing overshadowed the data. Last week we saw PBoC Governor Zhou Xiaochuan state that China still had ‘monetary policy space and multiple policy instruments to address possible downside risks’ and whilst some were expecting action over the weekend, yesterday we saw the PBoC demonstrate one such instrument by cutting the required reserve ratio (RRR) by 50 bp. According to our Chief China Economist Zhiwei Zhang, this is a sign of further policy easing and strengthens the case for their baseline expectations of 3 more RRR cuts (one per quarter) and 2 interest rate cuts (Q3 and Q4) in 2016. While such policy easing benefits short term investment growth and increases upside risks to our economists’ Q2 GDP forecast of 6.8% YoY, it actually raises downside growth risks in H2 and 2017 by exacerbating industrial excess capacity problems and the inflating the property bubble.
European equity markets brushed off the soft start following the inconclusive G20 meeting, China's pre RRR cut equity sell-off and Monday's weak economic data to end the day in the green. European equities rallied late in the day as the STOXX erased early losses and closed up +0.72%. Basic Resources equities (+3.43%) shot up as China announced more easing measures for its economy, while oil and gas stocks (+1.51%) also gained as crude prices rallied a percent or so. US equities slumped after Europe closed though with the S&P 500 declining 26 points from these highs to close -0.81% and in the process wiping out February's hard earn recovery into positive return territory. Meanwhile Valeant (a top 5 largest US HY issuer in the index) fell 18% on the equity market as the company announced it was under investigation by the SEC. Spreads widened 75-100bps on the news.
Back to Europe, soft data and heightened expectations of ECB easing drove European government bond yields lower once again. German bond yields fell across all maturities from 1-10 years, with the 10Y yield 4bps lower at 0.106bp and close to getting back into single digits bps again. The impact of China' easing and the building expectation of ECB easing was also seen in credit markets, with iTraxx Senior spreads tightening by 4.2bps while iTraxx Sub spreads tightening by 3.4 bps, thus continuing their rally from last week.
The renewed ECB hope was based on further gloomy European data. Following deflationary numbers out of Germany and France last week, inflation numbers for Italy (-0.2% YoY vs. +0.1% expected; +0.4% prior) and the Euro Area (-0.2% YoY vs. 0.0% expected; +0.3% prior) also turned negative in February. The cynic would certainly argue that after nearly a year of QE and an additional EU587bn on their balance sheet, inflation back below zero shows that the ECB has failed. However one must take into account that they are fairly powerless to counteract the huge price drop in oil and other commodities and also one wonders where inflation might have been if they had not printed over half a trillion Euros! A scary thought.
Below we look at the data day ahead, US politics will be in the spotlight today as Super Tuesday will see 12 states and one territory cast their votes for the Republican and Democratic nominees. It is the biggest day of the 2016 primary: roughly half of the delegates needed for a Republican candidate and one-third of the number needed for a Democratic candidate will be awarded here. Most polls (NBC News/WSJ) indicate Trump and Clinton to be the leading candidates for their respective parties across a number of participating states. Key results to watch for would be whether Texas Senator Ted Cruz can post a strong performance in Texas and level the playing field with Trump, and whether Clinton can further extend her lead over Sanders. Polls close in most states by 7 pm or 8 pm ET, though results will still be coming in tomorrow.
Taking a look at the day ahead in Europe, we have some key indicators to watch with the ECB meeting next week. We get the final February manufacturing PMI data for the Euro Area (expected 51.0) as well as regional data for Germany, France, UK, Spain and Italy. The Euro Area January unemployment rate (expected 10.4%) is also due. Over in the US, all eyes should be on the US ISM manufacturing data (as discussed above) while vehicle sales (expected: 17.70m), construction spending (expected: 0.3%), IBD/TIPP economic optimism data (expected: 47.9) and the manufacturing PMI (expected 51.2) are also due.
Today is quieter in terms of Central Bank speak: We are only scheduled to hear from Williams (President of the Federal Reserve Bank of San Francisco) and from Coeure from the ECB.