Three months ago, on December 4, when the ECB clearly disappointed markets and European stocks tumbled as the Euro soared, it took a speech by Mario Draghi at the Economic Club in NY to send stocks soaring...
... when Draghi explained that the ECB's announcement was not at all "disappointing", and subsequently held this exchange with former BOE head Mervyn King who asked "was today's speech deliberately designed to try offset some of the reaction yesterday?" to which Draghi responded "Not really... well, of course." As shown in the chart above, stocks promptly soared if only briefly.
Fast forward to the price action over the past 24 hours, when markets again stumbled into a world of mayhem after stocks first soared and the EUR tumbled, only for the move to reverse itself after Draghi hinted that there would be no more rate cuts. The markets clearly ignored the fact that at the same time, Draghi announced a far more important expansion of QE, one including corporate bonds to unclog what had been a largely blocked bond issuance pipeline together with 4 TLTROs which would end up paying banks to lend money.
It took a while, but market participants got it: "Draghi made the mistake of essentially saying that the ECB was done with stimulus, and the market overreacted to this,” said Teis Knuthsen, CIO at Saxo Bank’s private- banking unit. “At the end of the day, the ECB delivered more than expected and is pumping a lot of money into the system. A few years ago this would have marked the start of a significant rally, but now there seems to be a widespread fatigue with monetary policy."
Maybe, but not today, because the result has been that after "reassessing" - in Bloomberg's parlance - what the ECB did, following yesterday's plunge, risk has soared overnight with both Asian and European stocks surging, sparing Draghi the indignity of having to explain why he did what he did, and that it was all to prop stocks higher. Sure enough, as of this moment European bourses are all broadly higher led by banks, with the DAX and FTSE both up over 2.7%, while the Stoxx 600 is higher by 2.3% as of this writing.
Nowhere is the return of euphoria clearer, however, than in bank stocks, which as seen below are soaring.
Still, as Bloomberg notes, despite today’s advances, European equities are heading for their first weekly drop in four, with the Stoxx 600 down 0.6 percent. Commodity producers, automakers and banks - the most battered in the recent selloff - had led a 13 percent rebound from February’s low through a five-week high on March 4. As of yesterday, the index traded at 14.6 times estimated earnings, still far below the 16.7 multiple reached last April.
As Bloomberg adds, "investors have had to deal with increased volatility this year, and Thursday’s market reaction exemplifies a trend that’s been intensifying in recent months: central banks are increasingly powerless when it comes to calming markets. The Euro Stoxx 50 Index of the biggest euro-area companies moved more than 5 percent intraday, its wildest swings since August, and the most on an ECB day since 2011. A measure of volatility expectations increased for four straight days, its longest streak this year. It tumbled 10 percent on Friday."
For now, the markets have contained the damage, filling yesterday's gaps on what still remains the ECB's kitchen sink. The question remains where will the incremental stimulus come from?
Elsewhere, oil is higher by over 2% after the latest reported by the IEA which predicted that oil prices may have finally bottomed.
In any case, this is where the markets stand currently:
- S&P 500 futures up 1% to 2000
- Stoxx 600 up 2.3% to 341
- FTSE 100 up 1.5% to 6126
- DAX up 2.7% to 9757
- German 10Yr yield down 3bps to 0.28%
- Italian 10Yr yield down 11bps to 1.35%
- Spanish 10Yr yield down 8bps to 1.51%
- MSCI Asia Pacific up 0.7% to 126
- Nikkei 225 up 0.5% to 16939
- Hang Seng up 1.1% to 20200
- Shanghai Composite up 0.2% to 2810
- S&P/ASX 200 up 0.3% to 5166
- US 10-yr yield up 1bp to 1.94%
- Dollar Index up 0.54% to 96.59
- WTI Crude futures up 2.7% to $38.87
- Brent Futures up 2.2% to $40.95
- Gold spot down 0.5% to $1,265
- Silver spot down 0.1% to $15.58
Top Global News
- JPMorgan Said to Cut Credit Traders Amid Emerging-Market Swings: Bank cut several EM credit traders, including global head Robert Milam, due to volatility in asset class.
- United Technologies Weighing Acquisitions in Fire, Aerospace: “I wouldn’t be afraid to do a big deal, but it’s got to be something that’s actionable,” CEO Gregory Hayes said.
- Yahoo’s Mayer Hopes to Stay in Job Even If Changes Hands: Under pressure from investors, facing potential proxy fight, CEO Marissa Mayer has pledged to do what’s best for shareholders.
- Buffett’s Gen Re Shuts Operations in Hong Kong, Melbourne:Reinsurer said it’s exiting property-casualty operations at 6 smaller locations amid a global reorganization.
- AmEx Targets Loan Growth as Rivals Cut Fees in Partnerships: Focus on financing may help co. bolster revenue amid increasingly aggressive bidding on deals with retailers, airlines that bring in customers, fee-generating spending.
- Trump Embraces Unity; Bats Away Rivals in Subdued Debate: Final four candidates for Republican nomination mostly got along during the first half of the latest debate.
- Apple Announces March 21 Event to Update Smaller IPhone: Co. will introduce updated iPhone with 4-inch screen: person familiar.
- Oil Price May Have Bottomed as High-Cost Output Falls: IEA: Non-OPEC production to decline by 750kbbl/d this year, higher than last month’s est. by 150kbbl/d.
- Iron Ore Sags Toward $50 as ‘Insane’ Advance Gets Rolled Back: Analysts said that price leap at start of week simply wasn’t justified given poor fundamentals.
Looking at regional markets, we start as usual in Asia, where equity markets shrugged off the early dampened sentiment triggered by comments from ECB President Draghi that signalled a possible end to the ECB's rate cut cycle, with the region recovering as it digests ECB's looser policy and gains in oil prices. ASX 200 (+0.3%) and Nikkei 225 (+0.5%) were initially led lower by the energy sector, but then rebounded in late trade as oil re-approached 3-month highs, while Japanese stocks were also supported as JPY pared some of yesterday's strength. Shanghai Comp (+0.2%) was also pressured at the open following a consecutive net weekly drain by the PBoC and a 3rd straight decline in margin trading, before reversing alongside the regional improvement in risk-tone. 10yr JGBs traded lower following spill-over selling in T-notes with demand also subdued amid recent volatility in Japanese bonds. The PBoC injected CNY 20bIn via 7-day reverse repos for a net weekly drain of CNY 205b1n vs. CNY 840b1n drain last week; PBoC set the CNY mid-point at 6.4905 vs. last close. 6.5075 (Prey. mid-point 6.5127); its strongest reference rate YTD.
Top Asian News
- Yuan Erases 2016 Drop as PBOC Raises Fixing Most in Four Months: Move follows advance in euro after Draghi’s says he didn’t see need to cut rates further
- Hong Kong Regulator Bans Hedge Fund Matchpoint Founder Raaj Shah: Shah failed to disclose all his personal trading accounts in line with firm’s policy
- BSI Singapore Banker Involved in 1MDB Investigation Leaves: Yak’s financial accounts were frozen as part of probe related to a Malaysian government fund
- China Said to Plan New Rules Facilitating Debt-to-Equity Swaps: Central bank and country’s top economic planning agency are tasked with outlining rules
- Hedge Fund Effissimo Ups Ante, Buying 25% of Japan Shipper: Kawasaki Kisen Kaisha shares have dropped almost 40% in past year
- Cyberdyne Plans Nasdaq Listing Next Year for U.S. Expansion: Maker of robot exoskeletons for physical therapy aims to boost its investor base
- Hedge Funds Bet on the Decline of Japanese Technology Giants: Oxford, Vinva and Stats among funds shorting technology stocks
In Europe, this morning has very much had a feel of 'the day after the night before', with markets continuing to feel the fallout from yesterday's ECB meeting but with little other newsflow guiding price action. In tandem with the bazooka released by Draghi and Co. yesterday, European stocks trade significantly higher today (Euro Stoxx: +2.5%), with the FTSE and SMI underperforming given the lack of direct impact from the ECB action . Financials outperform today on a sector specific basis, with particular outperformance in the periphery from the typically volatile Italian banking names. Elsewhere, Bunds are also benefitting from the ECB action yesterday with the German benchmark higher today and back above 161.50, while the periphery remaining tighter today in light of the new easing measures.
Top European News
- Old Mutual to Be Broken Up as CEO Hemphill Chases Growth: Co. to split into 4 units.
- Deutsche Bank Sees Industry-Wide Trading Revenue Drop in 2016: Securities firms will see debt trading revenue fall “slightly” from a year earlier; Deutsche Bank Cuts Bonus Pool 11% to Spreads Legal Costs
- ArcelorMittal to Sell Stock at 2.20 Euros in $3b Offering: Co. will sell seven new shares for every 10.
- Porsche Profit Rises 25% to Record as Macan SUV Lifts Sales: Revamp of brand’s 911 segment, robust demand for its SUVs should help Porsche meet its 15% operating profit margin target in 2016.
In FX, some temperance seen in EUR/USD this morning, with the 1.1200 breach yesterday topping out some 17 ticks through the figure but seeing profit taking bringing us back into low 1.1100's — briefly dipped below here. No major recovery seen as the USD index is edging higher tentatively, but what we did see is some notable EUR/GBP sales going through to lift Cable back to 1.4300, with a view to testing the Thursday highs at 1.4317. UK trade data saw the headline deficit narrowing — this the only reason we could see for sudden GBP focus. Elsewhere, USD/JPY is looking to 114.00 again, but we ran into strong resistance ahead of 114.55 Thursday, so we may see a little struggle up here, but will need a strong stock market performance to do so. USD/CAD is back testing the 1.3220 level, with Oil eyeing $39.0. Canadian jobs data later on today. AUD/USD through .7500 again, but momentum has faded here of late.
In commodities, oil markets are still trading at a relatively high levels as Brent stays above USD 40bbl with WTI above USD 38bb1 respectively with the spread differential tightening over the last 24 hours. Gold has been retracing after gains following the ECB rate decision and press conference. Base metals have all been trading slightly lower with many analysts touting profit taking after recent rallies. IEA have said that monthly production dips on outages in Iraq and Nigeria and Iran's market return more modest than forecast. World oil demand was revised to 94.6m from 94.4m bpd by the EIA. And they have also commented on the price of oil saying it may have bottomed out as high cost producers have cut production. (BBG/RTRS)
This afternoon in the light US calendar we get the February import price reading due up. There’s little in the way of Central Bank speakers today, while the latest Baker Hughes rig count will be closely watched in the commodity space.
Bulletin Headline Summary from RanSquawk and Bloomberg
- Markets continue to digest yesterday's ECB-inspired mayhem with European equities trading higher across the board in a pull-back of some of Thursday's losses
- Some temperance seen in EUR/USD this morning, with the 1.1200 breach yesterday topping out
- some 17 pips through the figure but seeing profit taking bringing us back into low 1.1100's
- Looking ahead, highlights include US Import Price Index, Canadian Net Change in Employme
DB's Jim Reid concludes the overnight wrap
With regards to the price action which ensued, the most impressive way to show the sheer swing in sentiment is by detailing some of the massive high to low ranges after that early rally faded fast. The Stoxx 600 peak-to-trough amounted to 4.07%, with the index eventually closing -1.66%. The range on the DAX was 4.98% and the closing level -2.31%. Peripheral bourses were actually the relative outperformers from an equities perspective, although that also reflects the fact that they rallied so hard on the initial headlines. The FTSE MIB closed -0.50% but not without a 4.69% range, while the IBEX (+0.07%) actually closed just in positive territory, again with a large 3.70% range however. European Banks were at the centre of the volatile moves with the Stoxx 600 Banks Index closing -0.52% and out-performing but the daily range amounting to 6.00%. It’s worth noting that we’ve also added an update piece from our European Banks team at the end of the report touching on some potential impacts for the sector post the announcements.
Elsewhere, the moves for the Euro seemed to cause some of the greatest debate. The single currency initially weakened over 1.5% in the minutes post the news, touching a low of 1.082 (and the lowest since the start of February) before then staging one heck of a rebound to rally off the lows and finish up +1.62% on the day at 1.118. The intraday high-to-low range of 3.66% lower than what we saw on December 3rd last year (when the ECB ‘under delivered’) but still the 10th highest daily range that we’ve seen in the currency in the last 10 years (especially impressive when you consider some of the massive swings in 2008/09 which account for seven of the top ten).
Rates markets were in major reversal mode too. 10y Bund yields initially tumbled 8bps lower to strike an intraday low of 0.156%, before spiking higher and closing at 0.304%, up 6.4bps on the day but the high-to-low range an impressive 17bps. Unsurprisingly moves in the peripheral bond market were even more exaggerated. 10y BTP’s were as much as 18bps lower on the day but closed 5bps higher with a range of 24bps. 10y Portugal yields actually closed 3bps tighter but again not without a 33bp range.
Along with the Euro, it was credit markets which were the other big outperformer on the day which is unsurprising given the news of the inclusion of corporate bonds in the ECB's expanded asset purchases. The iTraxx Main index was as much as 12bps tighter at one stage before paring a bit of that into the close to finish 7bps tighter. Crossover ended 18bps tighter although again was a huge 40bps tighter at its best. Senior and Sub iTraxx financials closed 7bps and 17bps tighter respectively with the peripherals names leading the charge.
The inclusion of non-financial corporate bonds was a surprise and it marks another landmark moment for the ECB. This is the first time they've entered the private unsecured market. Longer term this might be significant as it paves the way for other non-government or unsecured risk purchases at a later date. For now we'll have a good 3 months of speculation as to what they might buy and how successful they'll be. In the note my team have just published we take a look at what the potential universe looks like, as well as discuss how the ECB’s market of eligibility could grow through looking at issuance, redemptions and net issuance trends over the past decade or so. Ultimately we expect ECB purchases to be positive for IG credit, although clearly there is still a certain amount of execution risk, while the liquidity of the market is also a big consideration. Experience from ABS purchases has not been great but whatever the risks from a performance/liquidity perspective it's hard to imagine investors wanting to be short corporate bonds at least until the program starts in a few months or until more details are known.
Back to the bigger picture. Overall perhaps the eventual negative market reaction was due to the increasing realisation that this meeting might mark the point where focus shifts from easing being solely for the financial markets to one where it's aimed at improving credit in the economy. By association this may explain the significant rally in the Euro as markets feel that the game of trying to weaken the currency is shifting. Elsewhere if the sell-off in core rates yesterday reflected reflation then this would have been a positive. However the move in breakevens didn't suggest that this was the case so one has to be a bit concerned at the move. As a last word, clearly one has to be skeptical as to whether the package will work for the wider economy but it terms of having a go it's hard for us to say that it's not an impressive attempt.
It’s a rare occurrence – this year at least - for us to mention this so far along, but a selloff for oil markets (WTI -1.18%, Brent -2.48%) also coincided with the timing of Draghi’s negatively perceived comments and so certainly contributed to some of that risk-off move. That said, a bit of a rebound into the close for energy did eventually result in US equities bouncing off their lows to finish pretty much unchanged by the close of play (S&P 500 +0.02%), with US credit markets (CDX IG -5bps) enjoying similar gains to those in Europe.
This morning in Asia we’ve seen bourses rally back after an early weak opening which saw most markets open in the red. A big reversal for Oil (which has wiped out yesterday’s losses) has seen the Hang Seng (+1.06%), Shanghai Comp (+0.29%), Kospi (+0.28%), ASX (+0.32%) and Nikkei (+0.76%) all move back into positive territory. Market have also seemingly put to one side the latest CNY fix which was strengthened (+0.34%) by the most since November. Elsewhere credit markets are playing catch up in Asia this morning with iTraxx Asia and Australia indices 7bps and 5bps tighter respectively.
Before we look at today’s calendar and away from the ECB focus, labour market data in the US continues to remain supportive with last week’s initial jobless claims falling 18k to 259k (vs. 275k expected) and a new five-month low. Prior to this we saw Germany report a shrinking in their trade surplus in January, aided by an unexpected fall in exports (-0.5% mom vs. +0.8% expected). Finally in France the January industrial production print was up a much better than expected +1.3% mom (vs. +0.8% expected).
Looking at the day ahead, today we begin in Germany where shortly after this is out we’ll receive the final revision to the February CPI print (no change from the +0.4% mom expected). That’s before we turn to the UK where we’ll see the January trade numbers. This afternoon in the US the calendar continues to remain light with just the February import price reading due up. There’s little in the way of Central Bank speakers today, while the latest Baker Hughes rig count will be closely watched in the commodity space.
It’s worth keeping an eye out on some important China data over the weekend too (Saturday morning to be specific) where we’ll get the February industrial production, retail sales and fixed asset investment data. If that wasn’t enough, we’ll also hear from PBoC Governor Zhou tomorrow morning who is set to hold a press conference on ‘financial reform and development’. And if that still wasn’t enough, three regional elections in Germany this weekend will also prove an early test for German Chancellor Merkel’s refugee policy. Expect all this to help set the tone for the open on Monday.