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Markets Surge On Chinese Debt Flood; Worst European PMI In Over A Year; Crashing Pound

The overnight news was decidedly downcast, with first London mayor Boris Johnson voicing his support for Brexit leading to a collapse in the pound, validating our Saturday warning and then some, resulting in the biggest drop in cable in over a year over fears that the EU will lose one of its most critical members...

 

... then followed by a surprising loss, the first in 5 years, by HSBC - the bank that makes money laundering for criminals around the globe a breeze - as revenue dropped and loans to oil and gas companies drove a jump in impairment charges, leading to a 5% drop in its share price, but more concerning is that HSBC said bad loan impairments and provisions soared 32% to $1.62BN driven by the oil and gas sector. In other words banks are concealing far more energy losses on their books than they have so far admitted.

Finally, we got yet another indication that the global slowdown is spreading to Europe, when first French composite PMI printed at 49.8 missing expectations, then Germany's PMI likewise missed at 50.2, which meant that the Markit composite Purchasing Managers Index for the euro zone fell to 52.7, the lowest since January 2015, from 53.6. In Germany, manufacturing took a hit from falling overseas demand, while the composite gauge for France signaled “sluggish” economic growth.

From the Markit Report:

The flash Markit Eurozone PMI fell from 53.6 in January to 52.7, the lowest since January of last year. The second consecutive monthly slowing in the rate of output expansion reflected a waning in growth of new orders for a third successive month, resulting in the smallest rise in new business for 12 months.

 

Backlogs of work were broadly unchanged as a result of the weaker increase in new work. With outstanding business stagnant, firms limited their hiring of new staff, leading to the weakest net increase in employment for five months.

 

Manufacturing output showed the smallest increase since December 2014, moving closer to stagnation amid a further faltering in growth of new orders and exports. Services fared better, though nevertheless saw growth weaken to the slowest since January of last year. Moreover, a sharp deterioration in optimism about future activity growth in the services sector points to further weakness in coming months

It wasn't just Europe: in China the MNI business indicator for February declined 2.4 pts to 49.9, matching the level seen in November in the process. Meanwhile in Japan and kicking off a busy day for PMI’s the flash February manufacturing print tumbled 2.1pts this month to a well below market 50.2 (vs. 52.0 expected) which was the lowest since June.

And yet, despite - or rather thanks to - this slew of negative news, global markets and US equity futures soared from the moments Japan opened (driven by the traditional BOJ-inspired spike in the USDJPY), and never looked back - in the process even breaking Europe's futures exchange Eurex, as traders focused on the record surge in Chinese loan creation, which as we reported last week will have hit $1 trillion in the first two months of 2016, which in turn pushed commodities and especially iron ore higher by 6.2%, back over $50, or $51.52 a dry ton specifically, the highest level since Oct. 27. The commodity has jumped 18 percent this year after plunging to $38.30 in December, the lowest in more than six years; the reason: Chinese corporations are taking advantage of the debt glut and doing what got them in trouble in the first place: stockpiling.

 

Helping lift the risk mood was the PBoC which provided CNY 169BN of funds under its Medium-term Lending Facility and the Finance Ministry announced a reduction of home transaction taxes, pushing the Shanghai Comp higher by 2.4%, the highest level in one month.

So propped up by the Chinese central bank and by a debt-spewing Chinese finance ministry, with further hopes a backsliding European economy will mean even more easing by Draghi, the risk on mood is back: "People are willing to take risk again,” Karl Goody, a private wealth manager at Shaw and Partners Ltd. in Sydney told Bloomberg. “People are looking at the selloff this year and saying: enough is enough, there’s been enough pain now."

As a result of today's commodity euphoria, the Stoxx 600 was led higher by miners and carmakers. BHP Billiton Ltd. and Rio Tinto Group jumped more than 5 percent, among the biggest gains in Britain’s FTSE 100 Index.  Ironlcally, U.K. equities added 1.2 percent. The FTSE 100 this year is the best performer among major national measures in western Europe, helped by a weakening pound.

“While we still have some pretty big risks out there, the market has sold off so much it was about time we got a bounce back,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “We’ve seen a turnaround in the commodities sector. Some of the drag from China is also starting to ease. We have a bit further to go in this relief rally”

Futures on the Standard & Poor’s 500 Index expiring in March rose 1.2 percent, indicating equities will extend gains after posting their strongest weekly advance since November. Allergan Plc is among four S&P 500 members posting earnings on Monday. What is curious is that over the weekend the latest twist in the US Presidential campaign saw Donald Trump secure victory in the South Carolina Republican primary, beating Rubio and Cruz into second and third place respectively.  And while Trump's steamrolling in the primaries has been said to be broadly negative for equities, so far US equity futures are up well over 1.0%.

Bottom line: Central Banks > Donald Trump, if only for today.

Where markets stand right now:

  • S&P 500 futures up 1.2% to 1937
  • Stoxx 600 up 1.6% to 332
  • FTSE 100 up 1.2% to 6024
  • DAX up 2% to 9574
  • German 10Yr yieldunchanged at 0.2%
  • Italian 10Yr yield down 3bps to 1.54%
  • MSCI Asia Pacific up 0.7% to 120
  • Nikkei 225 up 0.9% to 16111
  • Hang Seng up 0.9% to 19464
  • Shanghai Composite up 2.3% to 2927
  • S&P/ASX 200 up 1% to 5001
  • US 10-yr yield up 3bps to 1.78%
  • Dollar Index up 0.65% to 97.23
  • WTI Crude futures up 3.6% to $30.70
  • Brent Futures up 3.2% to $34.07
  • Gold spot down 1.8% to $1,204
  • Silver spot down 2.3% to $15.00

Top Global News:

  • Cameron to Make EU Case to Parliament as Johnson Backs ‘Brexit’: Possible Cameron successor among most popular U.K. politicians
  • Pound Slides Most in a Year as Johnson Backs ‘Brexit’ Campaign: gauge of 6-mo. volatility climbs to highest since 2011
  • Brent Oil Pares Losses as Russia Sees Output Talks Done by March: Futures up as much as 1.9% in London, paring 2-day, 4.3% slide
  • For OPEC, Path From Oil Freeze to Output Cuts Isn’t Clear: Saudi Arabia is sending signals that its policy could change
  • China Stocks Rise to Highest in Month Amid Regulator Reshuffle: Former chief of Agbank replaces Xiao Gang as CSRC chairman
  • Yahoo Said to Start Approaching Possible Bidders Soon As Monday: Verizon, Comcast, AT&T likely to be among interested parties
  • EFG to Buy BTG’s Swiss Private Bank in $1.34b Deal: Purchase will double assets under management for EFG
  • PayPal Eyes Growth in New Alliances With Vodafone, America Movil: Mobile carriers are gateway to 740m potential customers
  • HSBC Posts Surprise 4Q Loss; Dividend in Line With Est.: HSBC reported 4Q reported pretax loss $858m; est. $1.95b; HSBC’s Asia-Pacific Hiring Practices Being Probed by SEC: London-based bank says it’s cooperating with U.S. regulator on investigation

Looking at regional markets, we start in Asia where equities began the week on the front-foot with nearly all indices advancing, with China support measures and commodity gains lifting sentiment. Nikkei 225 (+0.9%) was driven higher by JPY weakness, while firm earnings underpinned the ASX 200 (+0.7%). Elsewhere, Shanghai Comp (+2.4%) was underpinned after the PBoC provided CNY 169bIn of funds under its Medium-term Lending Facility and the Finance Ministry announced a reduction of home transaction taxes, while China's materials sector outperforms on steel and iron ore gains, with the latter rising limit-up to its highest levels since October. 10yr JGBs continued on its recent uptrend despite the risk-on sentiment in the region, while 20yr yields printed fresh record lows amid thin trade as participants await tomorrow's 40yr auction and expectations of the BoJ to enter the market for the super long-end on Wednesday. As reported over the weekend, China replaced the head of its securities regulator and announced Shiyu as the new CSRC chief to replace Xiao Gang.

Asian Top News:

  • Yuan Bears Who Beat Hedge Funds to the Trade See Pain Spreading: Walker of Asianomics predicts U.S. recession, Treasury rally
  • DBS Profit Rises on Interest Income as Bad-Loan Ratio Holds: Fourth-quarter earnings jump 20% to beat analyst estimates
  • In $39 Billion China Buyout Spree, Latest Offer Angers Investors: Jumei International’s going-private offer is less than 1/3 of IPO price
  • Negative Rates Advocate Fujimaki Says BOJ’s Kuroda Got It Wrong: Bank of Japan can’t halt inflation once it takes hold, Fujimaki says
  • China’s Debt Seen Rising Through 2019, Peaking at 283% of GDP: History points to financial crisis or slowdown, Goldman Sachs says
  • BlackRock Is Betting on Japan Stocks as Other Foreigners Flee: Overseas investors have sold a net 2.24 trillion yen this year

After negotiations with his European counterparts, UK PM Cameron has agreed a package of changes to the UK's membership of the EU and has subsequently announced a referendum on June 23rd to vote on whether Britain should remain a part of the EU. The agreement will take effect immediately if the UK votes to remain in the EU. Mr Cameron had originally wanted a complete ban on migrants sending child benefit abroad but had to compromise after some eastern European states rejected that and also insisted that existing claimants should continue to receive the full payment.

London Mayor Boris Johnson announced he would join the campaign for Britain to exit the European Union. A recent Ipsos/MORI poll found that of all the politicians in the UK, only Boris Johnson was capable of affecting the outcome of the referendum, adding a potential 15% to the 'Leave' campaign if he backed it publicly. (Huffington Post/Guardian)

European Top News:

  • Deutsche Telekom CEO Says Not Considering Sale of Dutch Unit: CEO Timotheus Hoettges speakss in interview on Bloomberg TV
  • Bank of Ireland Sees Dividend Next Year as 2015 Profit Soars 30%: underlying pretax, ex. items, EU1.2b in line with ests
  • AB Foods Raises FY Adj. EPS Outlook; 1H Primark Sales Miss Ests.: AB Foods now only sees “marginal decline” in FY adj. EPS, had seen “modest decline”
  • Telepizza Prepares to List Shares in Spain, Expansion Says: Could be valued at ~EU1.2b or 15 times Ebitda
  • Cortefiel Suspends IPO Plans on Political Uncertainty: Mundo: Newspaper cites unidentified people who took part in discussions
  • Unibail-Rodamco Sells Office Building for EU330m: Doesn’t disclose the name of the buyer
  • Corum CEO Tells Le Temps Swiss Watch Brand Has Become Profitable: CEO Davide Traxler cited in interview with Le Temps
  • Sanofi Says FDA Accepts NDA for Glargine, Lixisenatide Combo: Says decision anticipated in August

In FX, GBP underperforms this morning, with the most notable news over the weekend all focussed around Brexit concerns. While many were looking out for details of the deal between the EU and UK, the more interesting news came when London Mayor and touted possible PM successor Boris Johnson announced that he would campaign in favour of leaving the EU. A recent Ipsos/MORI poll found that of all the politicians in the UK, only Johnson was capable of affecting the outcome of the referendum, adding a potential 15% to the 'Leave' campaign. As such GBP plummeted overnight and fell further as European participants arrived at their desks, with EUR/GBP firmly above 0.7800 and GBP/USD lower on the day by almost 2.5 points, close to 1.4150.

In commodities, WTI and Brent futures have seen renewed strength today in tandem with the continuing rhetoric regarding an OPEC deal, with Russia stating they have set a March 1st deadline for completing consultations. While sources reported that the Iraq oil minister informed ministers that although Iraq will not join Doha's MOU, they will not boost crude production level in next 4 months either. Separately, the risk-on sentiment alongside the strength in the USD-index which has made a firm break above notable resistance situated at 97.17, has seen significant pressure in the precious metal complex with Gold seeing losses of over USD 20.

Iraq Oil Minister states that they will support all efforts to control prices, adding that they are very much cooperative. (BBG) Additionally, sources reports said Iraq Oil Minister Adil Abd al-Mandi informed ministers that although Iraq will not join Doha's MOU they will not boost crude production level in next 4 months either.

On today's docket in the US we get the manufacturing print in the US this afternoon (expected at 52.5) along with the Chicago Fed national activity index expected at -0.10.

Bulletin Headline Summary from RanSquawk and Bloomberg

  • Boris Johnson's Brexit announcement sees significant selling pressure filter through GBP.
  • Risk-on sentiment in full swing with European equities kicking off the week on the front foot.
  • Looking ahead, highlights include US manufacturing PM! and comments from ECB's Lautenschlager
  • Treasury yields rise in overnight trading amid global equity markets rally, U.S. dollar strength as British PM Cameron will address the House of Commons today about the U.K. remaining in the European Union.
  • The British pound weakened the most in a year against the dollar after London’s Conservative Mayor Boris Johnson said he’ll campaign for Britain’s exit from the EU, opposing Prime Minister David Cameron
  • HSBC Holdings Plc posted an unexpected fourth-quarter loss, its first since at least 2009, as revenue dropped and loans to oil and gas companies drove a jump in impairment charges
  • China’s stocks rose to the highest level in almost a month on speculation the new head of the nation’s securities regulator, Liu Shiyu, will take steps to boost the world’s second-largest equity market
  • As banks around the world cut sales and trading jobs in an effort to reduce costs, the bloodletting in foreign exchange is proving to be among the deepest and most painful as the world’s 12 biggest banks have reduced foreign-exchange headcount by more than a quarter since 2010
  • The world’s biggest banks last year generated the least revenue from fixed-income products since the 2008 financial crisis as businesses under-performed, clients pulled back from trading and assets lost value
  • The global oil glut will persist into 2017, limiting any chance of a price rebound in the short term as the surplus takes even longer to clear than previously estimated, according to the International Energy Agency
  • U.S. Treasury will auction $26b 2Y (Tuesday), $13b 2Y FRN and $34b 5Y (Wednesday), $28b 7Y (Thursday)
  • $4.05b IG corporates priced Friday (YTD volume $225.5b) and no HY priced (YTD volume $11.125b)
  • Sovereign 10Y bond yields mostly steady with Greece +12bp; European, Asian markets rally; U.S. equity- index futures rise. Crude oil and copper rally, gold falls

Key US Events:

  • 8:30am: Chicago Fed Nat Activity Index, Jan., est. -.10 (prior -0.22)
  • 9:45am: Markit US Manufacturing PMI, Feb P, est. 52.5 (prior 52.4)
  • 11:30am: U.S. to sell $37b 3M bills, $30b 6M bills
  • 1:00pm: NY Fed executive vice president Potter speaks in New York

DB's Jim Reid concludes the overnight wrap:

Since the news of the EU deal for the UK and associated referendum date announcement wires have been dominated by the response of Cameron’s fellow Conservative members, six of which have announced that they will campaign for ‘Out’ including London Mayor Boris Johnson. This is significant given the Mayor’s approval ratings and a big personality now in the ‘Out’ camp, although it remains to be seen just how much of an active role he will play in campaigning, possibly choosing to keep a low profile in light of his future Conservative Party leadership chances. The news comes after Justice Secretary Michael Gove announced himself that he will also campaign for Britain to leave too.

In any case, the weekend news has meant Sterling was the big mover when markets opened in Asia this morning. The Pound is currently down 0.85% versus the US Dollar and 0.68% against the Euro, although it has pared back losses of as much as 1% for both. FTSE 100 index futures are up +0.8% however.

Looking at the rest of markets this morning and specifically in Asia it’s generally been a fairly positive start. The Nikkei (+0.94%), Shanghai Comp (+2.49%), Hang Seng (+0.91%) and ASX (+0.98%) are all kicking off the week on the front foot, with the Kospi (-0.06%) the only index in the red. Supporting gains are a 1.5% bounce for Oil. The constructive start has also come despite some softish data this morning. In China the MNI business indicator for February declined 2.4pts to 49.9, matching the level seen in November in the process. Meanwhile in Japan and kicking off a busy day for PMI’s the flash February manufacturing print tumbled 2.1pts this month to a well below market 50.2 (vs. 52.0 expected) which was the lowest since June.

Meanwhile, US equity index futures are up half a percent this morning. Over the weekend the latest twist in the US Presidential campaign saw Donald Trump secure victory in the South Carolina Republican primary, beating Rubio and Cruz into second and third place respectively. Jeb Bush has since announced that he has suspended his campaign.

Quickly recapping what was a softish day for the most part on Friday, closing out a week of two halves. The optimism that was initially sparked on the back of those Saudi/Russia/Iran meetings concerning OPEC production freezes seemed to wane into the close of last week, with WTI wiping out the bulk of the week’s gains after dropping -3.67% on Friday and back below $30/bbl which was where it had kicked the week off. Brent (-3.70%) was down a similar amount on Friday which took it to -1.05% for the five days last week. A slightly higher than expected US CPI number (more shortly) also seemed to weigh on risk assets initially, although in fairness markets did bounce back by the close and it feels like we’ll need sustained run of better economic data to really swing Fed rate expectations from the lowly levels at the moment

After dipping as much as -0.8% in early trading, the S&P 500 closed unchanged by the close. That meant the index finished up +2.84% last week for its first weekly gain since January, although remember that this included two consecutive +1.65% daily gains on Tuesday and Wednesday before momentum faded away. It was a similar pattern for markets closer to home. The Stoxx 600 finished Friday -0.77% as a rough day for financials also played its part. That saw the index close up +4.47% last week although again with gains frontloaded. US credit was a tad softer on Friday with CDX IG 1.4bps wider meaning the index was 4bps tighter on the week. In Europe we saw Senior and Sub Fins finish 3bps and 5bps wider respectively on the day paring the five-day rebound to 5bps and 18bps tighter respectively. Main closed 3bps wider and was 5bps tighter on the week.

With regards to that data, headline CPI for the US in January came in higher than expected at 0.0% mom (vs. -0.1% expected) which saw the YoY rate lift to +1.4% from +0.7% although largely due to favorable base effects. Much of the focus was on a decent core print with the monthly reading of +0.3% mom also one-tenth ahead of expectations. That saw the YoY rate notch up to +2.2% which is the highest level now since June 2012 and continuing the strong momentum of late. It was noted that a big contributor to that was again rising shelter costs although other services were also said to play a part including medical costs, airfares and financial services. Treasury yields did initially move sharply higher post the data, with the benchmark 10y yield hitting 1.783% (up 7bps from the lows) before mirroring much of the move in equity markets to finish more or less unchanged at 1.745%.

Meanwhile, Cleveland Fed President Mester became the latest in the line of recent Fedspeakers. A voter this year and seen as a hawkish leaner, Mester joined Williams in saying that she wants to stay away from negative interest rates, while commenting that ‘policy is going to be moving gradually higher, not going backwards’ but that the actual path the Fed chooses to take ‘could very well turn out to be either less gradual or more gradual than what we anticipate it to be today’. With regards to her outlook, Mester noted that ‘my current expectation is that the US economy will work through this episode of market turbulence and the soft patch of economic data to regain its footing for moderate growth’ and that despite the volatility and various factors impacting markets this month, it would be ‘premature’ for her to materially change her outlook.

There was also some notable chatter out of the ECB to mention. In particular it was comments from Constancio which got our attention, with the ECB official highlighting that ‘in looking to what can be done if we decide to ease further, we’ll have to mitigate the effect on banks as other countries have done’. The comments lending further weight to the possibility that the ECB might be shifting away from outright deeper depo cuts and possibly instead to a tiered deposit rate system or LTRO’s. Meanwhile, ECB Governing Council member Visco made comments of his own on Friday, the most significant being that he does not see any reason why the ECB could not take on bad loans as collateral, but also commenting that there has not yet been any discussion on this.