It has been a morning session of two halves.
In Asia, the mood was somber, and stocks fell with the Shanghai Composite (+1.1%) outperforming on another late session binge-fest by the National Team, and the Nikkei 225 (-1.4%), Hang Seng -1%, Kospi -0.2%, ASX -0.6%, Sensex -0.4% and the South Korean Won all down following news of the biggest Chinese Yuan devaluation in five weeks.
The European session, on the other hand was a different matter and after the USDJPY slid as low as 113.35 at the European open, it then proceeded to soar 100 pips and push European stocks (Stoxx 600 +1.7%) and US equity futures up with it, with the ES trading above 1900 as of this posting, adding to the best 2-day rally in the S&P in five months.
Shares in Europe also rose as companies including Credit Agricole SA and Schneider Electric SE reported better-than-estimated results.
Among the key corporate news, Glencore Plc pushed a gauge of commodity stocks higher, advancing 8.6 percent after the Swiss trader said it won new loan commitments from banks to replace an existing $8.45 billion revolving credit facility. Its bonds also gained. Total SA dropped 1.7 percent after a shareholder sold a stake at a discount. ABN Amro Group NV bucked the banking industry trend, sliding 2.2 percent after its quarterly profit missed analysts’ projections as regulatory costs rose.
Some observations were optimistic, such as this one by Justin Urquhart Stewart, co-founder of Seven Investment Management in London: "I’d love to think this is the start of a lasting rebound but it’s too early to tell. Any gains have been pretty fragile and short-lived lately, even though earnings haven’t been all that bad and economic figures have been quite supportive."
Others less so, such as this UBS technical analyst note: "We see Europe starting our suggested multi-week corrective/volatile rebound into later 1Q/early 2Q before resuming its underlying bear trend into deeper summer on the back of the recent break down in small and mid-caps. After the undershooting in banks, we expect a bounce in the Euro Stoxx 50 to remain capped at 3050 to best case 3200. On the sector front, a bounce should be led by autos, chemicals, industry, energy and miners, whereas a rebound in financials should sooner or later lose momentum."
But ultimately it all remains about oil, which after sliding to $29 yesterday after the disappointing summit between Russia and Saudi Arabia, has rebounded on hope that today's follow up meeting between Iran, Iraq and Venezuela may provide something actionable. It won't, as the following tweet from a WSJ correspondent indicates, and instead the stage for the fingerpoint is now set.
Gulf OPEC Official: “If Iran rejects the proposal, we cannot be blamed for not trying. The ball is in their court now."
— Summer Said (@summer_said) February 17, 2016
Focusing on regional markets, we start in Asia where stocks shrugged off Wall St. gains to trade negative with energy losses weighing bourses. Nikkei 225 (-1.4%) underperformed on JPY strength, while the biggest decline in machine orders in over a year also added to the gloom. ASX 200 (-0.6%) saw energy names heavily pressured after crude retreated back below the USD 30/bbl level, while Woodside Petroleum shares also dragged the sector lower following a 99% decline in profits. Elsewhere, the Shanghai Comp (+1.1%) fluctuated between gains and losses after an early upbeat tone following reports of increased funds for infrastructure spending and officials also discussing a reduction in bad loan provision ratios, was counter-balanced by a somewhat reserved PBoC liquidity operation. Finally, 10yr JGBs saw spillover selling from T-Notes where large corporate issuances and firm US stock momentum weighed on US paper while the BoJ's presence in the market today was for a relatively modest amount. Japanese PM Abe adviser Honda says the BoJ may increase stimulus at the March meeting and that the tax hike should be delayed until 2019.
In Europe, European equities started the session off on the front-foot with a slew of earnings reports and a paring of yesterday's losses enough to out-muscle underperformance in energy names amid the latest OPEC/Non-OPEC¬related headlines. Furthermore, financials have also been dealt a helping hand by stellar earnings from Credit Agricole (+11.1%) and elsewhere to the downside, utilities are seen softer in the wake of RWE suspending their dividend for ordinary shares. From a fixed income perspective, Bunds trade modestly higher with no real sustained direction as participants awaited supply from both the UK and Germany for much of the morning, which was technically uncovered when auctioned. Portugal spent the European morning wider to the German benchmark as has often been the case over the past few week. Elsewhere in the periphery, concerns continue to linger for Spain as to whether or not the nation would be able to obtain a definitive outcome if they were to hold a fresh round of elections.
In FX, much of the focus has been on GBP this morning, with the backdrop of the EU renegotiations added to by the UK employment report. The jobless rate was unchanged at 5.1% which caused and immediate hit on the Pound, led by Cable. Earlier in the day, we saw losses through 1.4250 limited to 1.4242, held up by some strong bids at these levels, which then formed the basis of a sharp turnaround as the rest of the numbers proved very healthy. Claims fell by a much larger than expected 14.8k and once digested, saw Cable taking out 1.4300 and pushing the GBP to session highs against the rest of its major counterparts. Elsewhere, early stock market jitters saw USD/JPY dipping below 113.50, but as sentiment eased, we saw a slow grind back to 114.00 and above, but the Asia highs ahead of 114.40 cap for now. Oil prices moving higher despite ongoing wrangling over the production freeze (Iran), and this has given CAD some relief to send the spot rate back towards 1.3800.
In commodities, energy markets traded relatively unchanged through most of the session as participants await further headlines regarding any success/breakdown in negotiations regarding a co-orindated production freeze. However, in the lead up to the beginning of the 1030GMT meeting between Qatar, Venezuela, Iraq and Iran WTI and Brent futures both saw a bid, with the former heading higher, towards the USD 30/bbl level, although with no fundamental catalyst immediately behind the move. In terms of metals markets, Gold traded higher overnight amid weakness in Asia-Pac stocks and a pull-back in the USD, however, prices have since retreated from their best levels alongside the upside seen in European equities.
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Bulletin Headline Summary from RanSqawk and Bloomberg
- FX markets have seen USD/JPY and GBP/USD retrace earlier losses with both heading into US crossover seeing a bid, as participants shrug off mixed UK employment release and sentiment strengthens through the European morning
- While Asian equities failed to benefit from the positive Wall St close, European equities have traded higher this morning, benefitting from stock specific news as well as an uptick in sentiment
- Today's highlight is the release of the FOMC Minutes, while participants will also be looking out for US housing starts, building permits, industrial production and API Crude Oil Inventories
- Treasury yields little changed as European equities and oil rally during overnight trading; Fed minutes to Jan. 26-27 meeting to be released at 2pm ET.
- The yuan posted the biggest two-day decline in more than a month as the central bank’s fixing for the currency tracked an overnight advance in the dollar and official media voiced concern that capital outflows will increase
- China’s unprecedented jump in new loans at the start of 2016 is fueling concern that excessive credit growth is piling up risks in the nation’s financial system. The increase could pressure the country’s credit rating, S&P said Tuesday
- China is stepping up support for the economy by ramping up spending and considering new measures to boost bank lending. The nation’s chief planning agency is making more money available to local governments
- The BOJ should act preemptively to change the deflationary mindset in Japan and this action could come as soon as March, said Etsuro Honda, an adviser to Prime Minister Shinzo Abe
- Wall Street firms are readying themselves for a provision of the 2010 Dodd-Frank law that takes effect in December that forces banks to keep a stake in the commercial-property loans they package into securities and sell off to investors
- Syria’s five-year war has turned into a tangled web of proxy conflicts between global and regional powers, with a growing risk that some of them could clash directly. Right now the most dangerous flashpoint is between Russia and NATO member Turkey
- Apple rejected a court order to help the Justice Department unlock an iPhone used by one of the shooters in a terrorist attack in California, accusing the U.S. government of “overreach” that will set a dangerous precedent
- $23.425b IG corporates priced yesterday (YTD volume $206b) and $350m priced yesterday (YTD volume $9.625b)
- Sovereign 10Y bond yields little changed; European stocks higher, Asian markets drop; U.S. equity-index futures higher. Crude oil, copper and gold rally
US Event Calendar
- 7:00am: MBA Mortgage Applications, Feb. 12 (prior 9.3%)
- 8:30am: Housing Starts, Jan., est 1.173m (prior 1.149m)
- Housing Starts m/m Jan., est. 2.0% (prior -2.5%)
- Building Permits, Jan., est. 1.2m (prior 1.232m, revised 1.204m)
- Building Permits m/m, Jan., est. -0.3% (prior -3.9%, revised 6.1%)
- 8:30am: PPI Final Demand m/m, Jan., est. -0.2% (prior -0.2%)
- PPI Ex Food and Energy m/m, Jan., est. 0.1% (prior 0.1%, revised 0.2%)
- PPI Ex Food, Energy, Trade m/m, Jan., est. 0.1% (prior 0.2%)
- PPI Final Demand y/y, Jan., est. -0.6% (prior -1%)
- PPI Ex Food and Energy y/y, Jan., est. 0.4% (prior 0.3%)
- PPI Ex Food, Energy, Trade y/y, Jan. (prior 0.3%)
- 9:15am: Industrial Production m/m, Jan., est. 0.4% (prior -0.4%)
- Capacity Utilization, Jan., est. 76.7% (prior 76.5%)
- Manufacturing (SIC) Production, Jan., est. 0.2% (prior -0.1%)
- TBA: Consumer Price Index benchmark revisions
- TBA: Mortgage Delinquencies, 4Q (prior 4.99%)
- Mortgage Foreclosures, 4Q (prior 1.88%)
Central Banks
- 2:00pm: FOMC Minutes, Jan. 26-27
- 7:30pm: Fed’s Bullard speaks in St. Louis
DB's Jim Reid concludes the overnight wrap
While the rally in Europe succumbed to a bit of fatigue yesterday with the Stoxx 600 closing with -0.43% after a day of whippy price action, the US reopened after Monday's holiday with a fairly positive tone to build on the momentum generated from the end of last week, culminating with the S&P 500 closing with a +1.65% gain. Much of the focus however was on oil markets and specifically the meeting between Saudi Arabia and Russia. The initial headlines appeared positive and saw WTI spike as high as $31.50/bbl before disappointment set in that actually there was little fundamental change from the meeting and instead realization set in that talks had moved from cuts to a freeze in production. WTI closed -1.36% on the day at $29.04/bbl.
In terms of the details, it emerged that Saudi Arabia and Russia, along with Venezuela and Qatar had agreed to freeze current production at January levels. As our Commodity strategy colleagues highlighted yesterday in their note, the Russia Oil Ministry stated that this freeze would only take effect if other producers participate, without specifying how many or which countries would be required to join the agreement. While a credible agreement to hold production flat by all OPEC members at the January level would be quite meaningful in tightening forward expectations of market balance, a lot of this would hinge on the need for the inclusion of Iran and Iraq. Talks are expected to continue in Tehran today but expectation levels are low given that Iran has publicly stated that it will restore production to pre-sanctions levels regardless of price.
A silver lining is that the talks are overall a positive step forward for sentiment in advance of the scheduled June OPEC meeting. Clearly though there is the need for negotiations to progress to achieve any sort of coordinated agreement in production cuts between OPEC and non-OPEC members however.
Glancing at our screens this morning it appears that weakness in energy names following the news yesterday is to blame for a broadly weaker start in Asia this morning. Bourses in Japan in particular have seen the greatest losses with the Nikkei currently -1.88%. Elsewhere the Hang Seng (-0.50%), Kospi (-0.27%) and ASX (-0.57%) are also in the red as we go to print, while Chinese bourses (Shanghai Comp +0.31%) have just nudged back into positive territory. Oil markets are actually about half a percent firmer while US equity index futures are unchanged.
Away from the focus on Oil yesterday there was also some data and Fedspeak for us to digest. With regards to the former first of all there was a notable downturn in this month’s German ZEW survey. The current situations index plunged 7.4pts to a below-market 52.3 (vs. 55.0 expected) which is the lowest in 12 months and clearly a reflection of the European banks, global growth and China woes which have played their part this year. The expectations survey fared little better, tumbling 9.2pts to 1.0 (vs. 0 expected). In the UK meanwhile the January CPI print was lower than expected at -0.8% mom (vs. -0.7% expected). That said the YoY rate did nudge up one-tenth to +0.3% with the core sitting at +1.2%. In the US we saw the February Empire manufacturing survey continue to remain weak this month at -16.6 (vs. -10.0) despite improving nearly 3pts from January. Meanwhile the NAHB housing market index declined 3pts to 58 which came as a slight surprise with consensus expectations having been at 60, although it still remains close to its cyclical high.
In terms of the Fedspeak, Philadelphia Fed President Harker (non-voter) provided a fairly cautious overview of the US economy. Harker opined that ‘it might prove prudent to wait until the inflation data are stronger before we undertake a second rate hike’ and that ‘I am approaching near-term policy a bit more cautiously than I did a few months ago’. Harker did highlight that his overall view of the US economy is upbeat, but that risks to his outlook are very much tilted to the downside. New Minneapolis Fed President Kashkari also made some interesting comments yesterday. The former US Treasury official was fairly up front with his views on US Banks, saying that ‘the biggest banks are still too big to fail and continue to pose a significant risk to our economy’. He remarked that ‘now is the right time for Congress to consider going further than Dodd-Frank with bold, transformational solutions to solve this problem once and for all’.
Recapping the rest of the price action yesterday, Gold extended its move lower for a third day, finishing -0.73% at $1200. US Treasury yields were a smidgen higher with the benchmark 10y in particular up 2.4bps to 1.773%. European credit indices and financials in particular were a touch wider, while US indices finished 1bp tighter although the real news was in the primary market with the new issue market in the US reopening with a bang. Indeed over $23bn of deals were said to have been raised yesterday in the second busiest day of the year, led by a bumper nine-part $12bn deal for Apple while IBM and Toyota Motor Corp were also out with sizeable deals of their own. Despite the volatility in credit markets of late, clearly demand hasn’t waned too much with the order book for Apple in particular said to have reached $28bn.
Taking a look at today’s calendar now, the only data of note in the European session this morning will again come from the UK where we get the latest employment report where focus will be on the December unemployment and weekly earnings prints in particular. This afternoon in the US we’ll see the January housing starts and building permits data. Last month’s PPI print will also be worth keeping an eye on before we get the January IP report where expectations are currently running for +0.4% mom. Capacity utilization and manufacturing production data is also due before we get the January FOMC minutes this evening (7pm GMT) although as we’ve since heard from Fed Chair Yellen at her semi-annual testimony so the minutes will now look a little outdated. There’s no Fedspeak due today while earnings wise we’ve got 13 S&P 500 companies set to report.