Things are looking increasingly shaky for central planners around the globe.
After yesterday's dramatic rout in US equities, which was saved toward the end of trading by a "dash for trash" short squeeze in which several repo desks unleashed forced buy-ins on some of the most shorted companies pushing the Dow Jones 450 points off its lows, China followed up with its own latest intervention spin when it injected a whopping CNY400 billion or $60 billion in liquidity into the financial system, the most in 3 years. This helped push stocks well into three green in early trading, however once the realization spread that this may be taking place in lieu of the much anticipated RRR or rate cut, the Shanghai Composite which first rose just shy of 3,000, subsequently tumbled closing at the lows, down -3.2% at 2,880.
A comparable revulsion in sentiment emerged in Japan where the Nikkei likewise roared higher in early trading, only to plunge at the close, down nearly 400 points, or 2.4%, ending just above 16,000 a new 15 month low. The Nikkei surged more than 300 points in early afternoon trading as investors took heart from a rise in U.S. stock index futures, brokers said. But the rally rapidly lost steam and slipped into negative territory later, with large-cap issues encountering selling from investors in oil-producing countries amid tumbling crude oil prices, they said. The market was also dragged down by a flurry of index futures-led selling, they added.
But once again, the key driver of risk around the globe was oil, which after initially staging a modest rebound after yesterday's NYMEX close after having been down as much as 7%, has since drifted lower once again not helped by the latest far greater than expected API inventory build and certainly not by comments such as this one by BP CEO Bob Dudley who said markets are facing a "flood of oil." So important is every up and (mostly) downtick in oil, that even the ECB's statement due out shortly and Draghi's press conference to follow, both so important in early December when a Draghi's build up to a massive bazooka unveiled a tiny water pistol, have taken on a secondary importance today with most expecting nothing of substance from the former Goldman employee.
So where are we now: the Stoxx Europe 600 Index is up 0.4% while S&P futures, which first soared in early trading, subsequently tumbled as much as 1% to trade about 0.4% lower as of last check. To be sure, as Bloomberg comments, "volatility has coursed through financial markets in 2016 and at least 40 equity markets around the world with a total value of $27 trillion are now in bear territory as turmoil in China shows no signs of abating and the selloff in crude oil deepens."
Investors seeking reassurance will look to President Mario Draghi’s briefing after the ECB’s interest rate announcement for indications of how the central bank will react to the equity slump and oil’s damping effect on inflation.
“There’s no reason to be overweight equities, but the ECB could have a reassuring impact today,” said Francois Savary, the chief investment officer of Prime Partners SA, a Geneva-based investment manager. “Markets need to hear that the bias of monetary policy remains accommodative. We’ll get no lasting rebound without some fundamental news that really shifts sentiment.”
They will likely not get it today from Draghi, who after last month's debacle, will likely be far more muted in what he promises, says or does.
More details on where we stand now:
- S&P 500 futures down 0.4% to 1848
- Stoxx 600 up 0.4% to 323
- FTSE 100 up 0.4% to 5695
- DAX up 0.4% to 9432
- German 10Yr yield up less than 1bp to 0.48%
- Italian 10Yr yield down 2bps to 1.63%
- Spanish 10Yr yield down 3bps to 1.75%
- S&P GSCI Index up 0.2% to 272.2
- MSCI Asia Pacific down 1.7% to 115
- Nikkei 225 down 2.4% to 16017
- Hang Seng down 1.8% to 18542
- Shanghai Composite down 3.2% to 2880
- S&P/ASX 200 up 0.5% to 4864
- US 10-yr yield up less than 1bp to 1.99%
- Dollar Index down 0.02% to 99.08
- WTI Crude futures up 0.1% to $28.39
- Brent Futures up 0.1% to $27.91
- Gold spot down 0.3% to $1,098
- Silver spot down 0.6% to $14.07
Looking at regional markets in more detail, we start in Asia, where equity markets saw choppy trade, with an initial recovery in the commodities complex providing support before most of the major indices fell back into the red ahead of the close, while the PBoC also injected the largest amount of liquidity into the inter-bank market in 3 years and PBoC's chief economist states that cash injections could be used as a substitute for a RRR cut. However, sentiment then reversed in late trade as crude failed to sustain a rebound.
Nikkei 225 (+2.4%) initially gained as Japanese exporters were underpinned by a weaker JPY but then shrugged off gains in late trade, while the ASX 200 (+0.5%) was led by gains in basic materials after several large mining names reported firm quarterly results. Elsewhere, Chinese markets also fluctuated between gains and losses, with the Shanghai Comp (-3.2%) initially recovering after the PBoC conducted a CNY 400bIn open market operation injection, before paring as sentiment soured in late trade.
The MSCI Emerging Markets Index slid 0.7 percent, poised for the lowest close since May 2009. The gauge is down 13 percent this year and trades at 10.1 times its 12-month projected earnings, the least since March 2014. Hong Kong’s Hang Seng China Enterprises Index sank 1.8. The Shanghai Composite lost 3.2 percent to the lowest since Dec. 2014. The gauges have both fallen more than 18 percent this year.
Top Asian News:
- Hang Seng Index Sinks Below Net Assets for First Time Since 1998: Hang Seng Index fell 1.8% at close, sending its price-to-book ratio below one.
- PBOC Injects Most Cash in Three Years in Open-Market Operations: China adds 400b yuan using 7-, 28-day reverse repos.
- ’Too Early’ for Further BOJ Stimulus, Abe Aide Shibayama Says: Japan should confer with other nations’ financial authorities.
- With Modi Handcuffed, Few Dozen Judges Shape India Policy: Supreme Court’s speedy moves contrast with parliament gridlock.
European equities have had a choppy session, are relatively flat in terms of recent volatility and trade in mild positive territory. Most European equity indices broke the trend of Asia and opened in positive territory, swinging between gains and losses.
The Stoxx 600 added 0.5 percent at 10:49 a.m. in London, after rising as much as 1.2 percent and falling 0.2 percent. Commodity producers led gains.
Italian banks led lenders higher, with Banca Popolare dell’Emilia Romagna SC rising 3.7 percent and Banca Monte dei Paschi di Siena SpA jumping 26 percent, after Prime Minister Matteo Renzi said the domestic banking system is more solid than people think. Monte dei Paschi jumped 25 percent, after losing almost half of its value over the past three days, as European Union officials signaled they’re ready to speed up the process of setting up an Italian bad bank.
Deutsche Bank AG slid 7.3 percent after Germany’s biggest lender forecast a loss for the fourth quarter after setting aside more money for litigation and restructuring costs. As the chart below shows, for the DAX it is all about staying at or just above the long-term support. A drop below this means much more turbulence ahead.
Elsewhere in Europe the FTSE MIB (+0.35%) has managed to stop the rot, after underperforming for the last 2 sessions, after various officials have offered supportive comments. In spite of the looming risk event in the form of the ECB policy meeting Bunds trade flat, also shrugging off EUR 13.6bIn in supply from French and Spanish bonds.
Top European News
- Deutsche Bank Sees Quarterly Loss on Legal, Overhaul Costs: ~EU1.2b were earmarked for litigation, EU800m for restructuring/severance costs, mainly in private, business clients division.
- Barclays’ Staley Said to Cut 1,000 Jobs, About a Quarter in Asia: Bank to exit several Asian countries, keep prime brokerage.
- Pearson to Eliminate 4,000 Jobs as Forecast Trails Ests.: Cuts are equivalent to 10% of workforce; majority will be completed by mid-2016.
- Remy Cointreau Sales Beat Estimates on China, U.S. Demand: Sales rose 3.2% on organic basis in 4Q after 1H 2015 decline.
- UniCredit Offers to Buy Back EU1.8b of Junior Bonds: Bank offered to repurchase bonds, maturing from 2019 to 2022, at par or justaccording to statement on Thursday.
- Glaxo Chief Says Consumer Health Unit Can Exist on Its Own: Consumer health unit could be “conceptually thought about on its own,” CEO Andrew Witty said as he considers investors’ demands to break up co.
- Goldman Backs Group Campaigning for U.K. to Stay in EU: Contribution made to Britain Stronger in Europe group is latest sign that banking industry is battling Brexit.; JPMorgan Said Near Donation to Campaign to Keep U.K. in EU: Sky
- Sapa Sees Aluminum-Sales ‘Bump’ in Race to Make Cars Lighter: Co. expects “significant bump” in sales to North American automakers.
In FX, a steadier morning though not without significant incident. The RUB has taken some of the limelight this morning, falling to fresh record lows again and prompting Kremlin spokesmen to dismiss talk of a crash. Weak Oil clearly behind this, sending the MXN to new lows also, but the CAD has been much better behaved, trading a relatively tight range close to 1.4500. Large stops through 1.4430 now widely acknowledged. USD/JPY still on the back foot, but has tested through 117.00 again. Stocks the main driver still, but intervention fears now give the pair an upside 'skew'. All range bound elsewhere — EUR/USD still struggling inside broader 1.0800-1.1000 range.
In all important commodities, WTI and Brent have had a choppy session and reside just above and below the USD 28.00 handle respectively, and trade relativley flat on the day, a reprieve from the choppy price action of late. Given the price action of late, Algeria's energy minister has said that non OPEC members need a consensus to stabilize oil. Iraq also supports an OPEC meeting to boost price, providing a deal can be reached. However, they also say a non OPEC deal on output cut is required to boost prices, which is a sticking point with several OPEC members.
Base metals trade in negative territory but relatively flat in terms of recent volatility, as markets focus seems to be on the bleak outlook . The show of strength in the base metals at the start of the week has been depleted and prices have fallen as they retest support levels. Gold has broken below the USD 1,100oz level in recent trade, having benefitted from safe haven bids throughout Asia and the early European morning. According to Barclays, Venezuela's reckoning looms and says time may have run out, adding that a credit event may be hard to avoid as the oil price keeps sinking. However, according to four OPEC delegates, an emergency meeting is unlikely to occur as a result of Venezuela's request.
Onto the day ahead where this morning we turn to the aforementioned ECB meeting shortly after midday while Euro area consumer confidence data will be out shortly after. Over in the US this afternoon the main data of note is the Philly Fed business outlook print for January where current expectations are for a near 5pt improvement from December (albeit still at a lowly -5.2). Also due will be the latest initial jobless claims print. Earnings wise 19 S&P 500 companies are due to report today with the highlights being Verizon and Schlumberger – the latter being the first of the big oil names.
Bulletin Headline News from Bloomberg and RanSquawk
- European equities have had a choppy session, are relatively flat in terms of recent volatility and trade in mild positive territory
- A steadier morning in FX, though not without significant incident. The RUB has taken some of the limelight this morning, to fresh record lows again and prompting Kremlin spokesmen to dismiss talk of a crash
- Highlights today include the ECB rate decision, US weekly jobs data, Philly Fed and DoE crude oil inventories
- Treasuries slightly higher in overnight trading as European stocks rally ahead of ECB meeting, Draghi press conference; Asian stocks slide despite PBOC turning on “the liquidity firehouse.”
- Investment managers are warning that markets probably have further to fall as China’s growth slows, oil prices plunge and central bankers lack tools to prop up economies
- “Regulation has made the world more dangerous” as financial regulators failed banks before the financial crisis then stifled the industry’s recovery in Europe, according to Blackstone Group LP CEO Steve Schwarzman
- Brent oil extended its decline from the lowest close in more than 12 years as rising U.S. crude stockpiles added to a swelling global glut. Inventories rose by 4.6m barrels last week while official U.S. government figures Thursday are forecast to show a second weekly advance
- Italy’s banks are groaning under a pile of soured debt run up as the economy shriveled after the financial crisis; Banca Monte dei Paschi di Siena SpA, UniCredit SpA and Banca Popolare dell’Emilia Romagna SC were among lenders asked to submit data on their non-performing loans
- Banca Monte dei Paschi di Siena SpA rebounded in Milan trading, after losing almost half of its value over the past three days, as European Union officials signaled they’re ready to speed up the process of setting up an Italian bad bank
- Christine Lagarde picked up nominations from across Europe for a second term as leader of the IMF as part of a selection process that member nations intend to complete by early March
- Goldman Sachs donated hundreds of thousands of pounds to the campaign to keep the U.K. inside the European Union, to a person familiar with the matter
- Sovereign 10Y bond yields slightly lower, led by Hong Kong. Asian stocks drop, European stocks rally; U.S. equity-index futures fall. Crude oil drops, copper steady, gold falls
US Event Calendar
- 8:30am: Philadelphia Fed Business Outlook, Jan., est. -5.9 (prior -5.9, revised -10.2)
- 8:30am: Initial Jobless Claims, Jan. 16, est. 278k (prior 284k)
- Continuing Claims, Jan. 9, est. 2.250m (prior 2.263m)
- 9:45am: Bloomberg Economic Expectations, Jan. (prior 43.5)
- 9:45am: Bloomberg Consumer Comfort, Jan. 17 (prior 44.4)
- 1:00pm: U.S. to sell $15b 10Y TIPS
Central Banks
- 7:45am: ECB Main Refinancing Rate, est. 0.05% (prior 0.05%)
- 8:30am: ECB’s Draghi holds news conference in Frankfurt
Top Global News
- Foxconn Group Said to Offer About $5.1b for Japan’s Sharp: Japan’s INCJ also reported to be interested in Sharp deal. Sharp Said to Favor INCJ’s Plan vs Higher Foxconn Offer
- Macy’s Buyout Would Be a Miracle on 34th Street: Investors: 30 years after $3.6b LBO, activist investors are betting Macy’s will again become takeover target.
- Carlyle, Staples Meet Resistance as Credit Strains Surface: Investors who agreed to lend money to fund Staples’s $6.3b purchase of Office Depot are now trying to negotiate better terms on financing.
- Sports Authority Said to Struggle to Cut Debt as Default Looms: Co. skipped an interest payment last week on its $343m of 2018 subordinated debt; has been talking to bondholders about haircut on those notes in exchange for other securities.
- Tesla Sues German Parts Maker Over ‘Sagging’ Door on Model X: Co. said it seeks to avoid “a series of unreasonable demands” by Hoerbiger Automotive Comfort Systems LLC, including payment for breach of contract.
- Coal Miner ‘On Everybody’s List’ as Next Bankruptcy Victim: investors are wondering if biggest coal co., Peabody Energy Corp., could be next.
- Schlumberger Seen as Only Oil Servicer Standing as Margins Slump: Co. may be only one of its peers that turned 4Q profit in North America.
- Blizzard Expected to Bury Washington in Up to Two Feet of Snow: Friday blizzard expected to dump 1-2 feet of snow on Washington, as lesser amounts are forecast for New York City.
- Lagarde, Panelists Say China Transition Challenge Manageable: In comments echoed by fellow panelists Ray Dalio, Gary Cohn, Lagarde said China’s policy makers have shown “unbelievable determination” to deliver past reforms.
- Favorite Hedge Fund Holdings Are Among 2016’s Worst Stocks: Of 100 worst-performing cos. larger than $1b as of Jan. 19, more than half are at least 10% owned by hedge funds; 17 are at least 25% owned by such funds.
DB's Jim Reid concludes the overnight wrap
This morning markets in Asia had appeared to be feeding off that late surge into the US close with gains of over 1% following a similar gain for Oil. However a retracement back to unchanged for WTI has seen equity bourses in particular dip lower. The Nikkei (-1.08%), Hang Seng (-1.18%), Shanghai Comp (-1.05%) and Kospi (-0.26%) have all reversed course as we to print while US equity index futures are pointing towards a small loss. There’s been a strong rally in credit indices though with iTraxx Asia and Australia indices 6bps and 3bps tighter respectively. Meanwhile, ahead of the Chinese New Year early next month the PBoC has moved to shore up liquidity by injecting 110bn yuan of 7-day reverse repos and 290bn yuan of 28-day contracts, the most in three years.
I was casually looking at the equity market correction in a longer-term context yesterday and it reminded me that after extreme periods of overvaluation through history you often get multi decade periods of markets going sideways albeit with huge cyclical swings. For example the FTSE, CAC and IBEX are now at levels first hit on the upside in 1998. Looking at the Nikkei it first hit current levels in 1986 and the Italian market has been in the doldrums for decades too. Obviously with dividends more positive returns are still possible even in this long super cycle of stagnation but as a long-term historian of markets it's nice to see the old rules of over valuation taking decades to iron out still apply. Clearly this is irrelevant for market timing but absolutely applies to long-term trends which makes our annual long-term study the easiest document we write. For completeness we should say that the S&P 500 is up 85% since 1998 (albeit only 30% above its 2000 peak) and the DAX up 110%. They are rare DM winners over the period. Just for reference though the S&P 500 has traditionally paid lower dividends so the out-performance is notably less extreme when that's factored in.
With today a fairly quiet one for economic data, the focus looks set to be on the ECB meeting shortly after midday. We share the view of our European economists in that we expect neither a change in policy nor a clear signal of further easing. We do however think that the Council will highlight its capacity to act, the ‘open-ended’ nature of its policies and the flexibility around the asset purchase programme. Our colleagues take the view that the ECB will be reactive in addressing the risks to its inflation mandate and will wait for more visibility on the three key fronts; China, the oil price shock and inflation expectations. Looking further ahead to March, while our colleagues’ baseline case remains for now that the ECB is done, clearly there is material risk of further easing and for this to happen the most important number will be the staff inflation forecast for 2018. From our side we can't help thinking that the ECB will eventually be forced to do more but then again we've always felt the FED will eventually do QE4 so that shows our biases.
Moving on. It was hard to pinpoint an exact reason for that late swing in markets yesterday. Some pointed towards the expiry of the WTI Oil February futures contract yesterday as a reason (with the March contract trading higher) while some also highlighted the S&P dipping close to the key 1,800 technical level. In any case there was a similar swing in credit markets where CDX IG eventually completed a 5bp turnaround from the day’s wides to finish near enough unchanged on the day. Meanwhile US 10y Treasury yields dipped well below 2% for the first time since October, hitting an intraday low of 1.937% before closing out at 1.982% (still down 7.3bps on the day).
That in part also reflected a slightly softer US CPI print yesterday. The December headline reading of -0.1% mom came in a tad below expectations of no change, while the monthly core print (+0.1% mom vs. +0.2% expected) was also lower than hoped. More favorable base effects helped to lift the headline YoY rate to +0.7% (vs. +0.8% expected) from +0.5% while the core YoY rose one-tenth to +2.1% as expected. Meanwhile last month’s housing market indicators were mixed. Housing starts surprisingly dropped last month by -2.5% mom after expectations had been for a +2.3% gain. Building permits, while still soft, declined less than expected last month (-3.9% mom vs. -6.4% expected).
Prior to this, in Europe we saw German PPI come in slightly below market at -0.5% mom vs. -0.4% expected last month. There was slightly better news out of the UK however where the ILO unemployment rate declined one-tenth to 5.1% in the three months to November after the consensus had been set for no change. This reflected a decent bounce in the number employed, up by 267k in the period (vs. 235k expected).
On a slightly more positive note, yesterday’s US earnings were generally encouraging. Of the 7 to report, all 7 beat earnings expectations and 5 beat revenue expectations – although as we’ve highlighted previously that also reflects the now current low expectations in the market. The notable reporter was Goldman Sachs (which beat on both), the last of the big banks to report.
Onto the day ahead where this morning we kick things off in France with the latest January confidence indicators. That’s before we turn to the aforementioned ECB meeting shortly after midday while Euro area consumer confidence data will be out shortly after. Over in the US this afternoon the main data of note is the Philly Fed business outlook print for January where current expectations are for a near 5pt improvement from December (albeit still at a lowly -5.2). Also due will be the latest initial jobless claims print. Earnings wise 19 S&P 500 companies are due to report today with the highlights being Verizon and Schlumberger – the latter being the first of the big oil names.