It didn't take much to fizzle Friday's Japan NIRP-driven euphoria, when first ugly Chinese manufacturing (and service) PMI data reminded the world just what the bull in the, well, China shop is...
... leading to a 1.8% drop on the first day of February after Chinese stocks slid 23% in January with the nation’s manufacturing sector faces strong galewind challenges as the government plans to reduce excess industrial capacity and unleash troubling mass unemployment, while a weakening currency is spurring capital outflows.
And then it was about oil once again, when Goldman itself - which recently has been quietly changing its tone on oil to bullish - said not to expect any crude production cuts in the near future, to wit: "The past week featured headlines suggesting that OPEC producers and Russia would meet in February to discuss a potential coordinated cut in production. Despite the sharp bounce in oil prices that these headlines generated, we do not expect such a cut will occur unless global growth weakens sharply from current levels, which is not our economists' forecast."
Throw in some very cautious words from the sellside about what the BOJ's move actually means and Friday's month-end window dressing 2.5% surge is now just a distant memory.
As a result European stocks declined after the Chinese PMI fell to a three-year low in January. Nokia tumbles, dragging technology shares to biggest decline. Euro rose for an 8th day against the yen amid speculation the European Central Bank won’t be as aggressive as the Bank of Japan in boosting monetary stimulus.
"Investors are getting conflicting signals about global growth, Daniel Murray, London-based head of research at EFG Asset Management, told Bloomberg. “It’s all very confusing and it’s making people nervous. Even the smallest macro event or data point can tip sentiment either way.”
Asian stocks remained buoyed by the BOJ momentum rose for a 4th day as shares in Tokyo extended Friday’s rally after the Bank of Japan stepped up its monetary stimulus. Chinese shares extended their steepest monthly selloff since the global financial crisis after an official manufacturing gauge missed estimates.
“The BOJ’s action on Friday helped -- it’s a situation where you get short-term relief when central banks make supportive announcements or ease policy,” Steven Milch, chief economist at Suncorp Wealth Management in Sydney, said by phone. “I’m not sure central bank actions are a panacea, but they do help in relation to investor sentiment. Uncertainty is clearly very high and it is possible that some markets have overshot on the downside. There’s a possibility that risk aversion and volatility diminish as we go forward.”
Here is where we stood as of this writing:
- S&P 500 futures down 0.4% to 1924
- Stoxx 600 down 0.1% to 342
- FTSE 100 down 0.4% to 6057
- DAX down 0.4% to 9757
- German 10Yr yield up less than 1bp to 0.33%
- Italian 10Yr yield unchanged at 1.42%
- Spanish 10Yr yield up 1bp to 1.52%
- MSCI Asia Pacific up 0.9% to 122
- Nikkei 225 up 2% to 17865
- Hang Seng down 0.4% to 19596
- Shanghai Composite down 1.8% to 2689
- US 10-yr yield up 2bps to 1.94%
- Dollar Index down 0.22% to 99.39
- WTI Crude futures down 1.4% to $33.14
- Brent Futures down 0.4% to $35.83
- Gold spot up 0.4% to $1,122
- Silver spot up 0.4% to $14.31
Looking at global markets, we start in Asia where equities traded mixed with the Nikkei 225 (+2.0%) the notable outperformer as participants continued to digest last week's BoJ decision while the ASX 200 (+0.80%) was pushed higher with strength in health care names. Shanghai Comp. (-1.8%) underperformed amid rising risks that the nation faces a structural downturn following soft Official Mfg. PMI at its lowest since Aug'12, offsetting better than expected Caixin PMI data. JGBs were bid throughout the session, with yields plummeting to record lows in the 2-yr and 10-yr following the Friday's stimulus move by the BoJ, as such the yield curve has notably steepened.
Asian Top News
- Mitsubishi UFJ’s Profit Falls 27% on Bond Trading, Lending: 3Q net 253b yen, est. 249.8b yen
- Nippon Steel Plans Purchase, Stock Buyback to Weather Slump: Cut its full-year profit forecast by more than a fifth, announced a stock buyback and said it’s in talks to take control of domestic partner Nisshin Steel Co
- BOJ Rate Cut No Solace for Top Japan Fund That’s in Cash: J Flag’s Osezawa expects more market volatility to follow
- Yen Bulls Burned After BOJ’s Surprise Spurs Biggest Rout in Year: Bullish yen positions had reached most in almost 4 yrs
- Macau Gaming Revenue Falls 21.4% in Lull Ahead of Lunar New Year: Jan. casino rev. falls 21.4% y/y vs est. 22% drop
- Rupee to Restrain Rajan as India Deficit Risks Stoking Inflation: 36 of 38 economists surveyed see repo rate left at 6.75%
European equities trade mostly in the red following sentiment brought about by the release of soft Chinese Official manufacturing PMI data, which printed at its lowest since Aug'12 and showed the 6th straight month of contraction. Furthermore, the poor official figures offset better than expected Caixin PMI data, which still came in below 50, thus demonstrating contraction, highlighting the weak outlook for the global economy.
The IT sector is the laggard in the Eurostoxx50 (-0.7%), following an EU proposal for tough new data protection laws, which German giant SAP say could put companies at a disadvantage to their US counterparts. Dax underperforms in terms of indices, with ThyssenKrupp weighing on the German bourse, following negative sentiment in the metals complex.
Nokia Oyj dragged a measure of technology stocks to the worst performance of the 19 industry groups on the Stoxx 600, tumbling 11 percent after investors were disappointed by a court decision in a patent dispute with Samsung Electronics Co. Energy-related shares were also among the worst performers as the price of oil slid, with service provider Seadrill Ltd. leading declines.
Luxottica Group SpA fell 8.7 percent after quarterly sales missed analysts’ projections. The maker of Ray-Ban eyeglasses also said its co-Chief Executive Officer resigned. BT Group Plc rose 2.5 percent after quarterly profit beat estimates. Ryanair Holdings Plc gained 3.3 percent after forecasting fourth-quarter traffic will grow more than previously expected and saying it will return 800 million euros ($868 million) to investors via a share-buyback program.
European Top News
- Nokia Drops as Samsung Patent Ruling Disappoints Investors: An arbitration court of the International Chamber of Commerce settled the amount of additional compensation Samsung needs to pay to Nokia, the Finnish company said Monday, without providing exact financial details
- Euro-Area Factories Cut Prices as Deflation Risks Loom Large: Markit Economics said price pressures “remained on the downside” and output charges fell for a fifth month
- Domestic Demand Offsets Exports to Keep U.K. Factories Afloat: Markit Economics said on its factory gauge climbed to a 3-month high of 52.9 from a revised 52.1 in Dec.; forecast was 51.6
- Julius Baer to Boost Dividend 10% as U.S. Probe Nears End: Proposes to increase dividend to CHF1.10/shr, annual operating income misses analysts’ estimates
- Ryanair Doubles Quarterly Profit, Plans $868m Buyback: Fiscal 3Q profit after tax increased to EU103m from EU49m y/y, aided by a 25% surge in passenger numbers to 20m, will return EU800m to investors via a share-buyback program
- BT Profit Tops Estimates as Former Monopoly Pushes Into Mobile: 3Q adj. Ebitda GBP1.61b vs est. GBP1.58b, adds fiber broadband customers in 3Q
- Bankia Shares Climb After Fourth-Quarter Profit Beats Estimates: 4Q net profit EU185m, beats EU134.2m estimate
- Vallourec to Raise $1.1 Billion With Nippon Steel’s Help: Nippon Steel, Bpifrance to each own 15% of company after deal
In FX, a cagey start to FX trade this week, with AUD/USD the notable mover in the overnight markets after the China manufacturing PMIs disappointed. However, the mid .7000's look to be finding some support, so no further softening to report. Manufacturing PMIs the running theme for the day, but only the UK surprised (to the upside) to alleviate the heavy GBP tone from first thing. However, Cable running into fresh selling interest above 1.4300. USD/JPY has held 121.00-121.50; specs on the downside, and exporters capping. CAD (and the rest of the Oil related pairs) in consolidation mode despite slight WTI slippage. More comments from OPEC sources; Saudi's open to cooperated 'oil market management', but no immediate need for emergency meetings. More large 1.0800 EUR/USD strikes; strong bids ahead still in place.
In commodities, oil trades lower in the European morning, with the ongoing production-cut saga still dominating price action in the market. The latest comments today came from OPEC sources in Saudi press, who stated that they 'are ready to manage the market', with the usual caveat of OPEC and non-OPEC co-operation. An uptick was observed initially, however this move was pared following comments from the same source, which stated it's too early to talk about emergency OPEC meeting. Furthermore, Goldman Sachs see output cuts by Non OPEC members as highly unlikely. Brent and WTI have the USD 35.00 and USD 33.00 handles respectively, with any further price action today likely to be driven by further comments.
Aluminum was 0.6 percent lower at $1,509.50 a ton, and industrial precious metals platinum and palladium were also lower. U.S. natural gas futures fell 4.2 percent. Gold climbed 0.3 percent to $1,121.83 an ounce on haven demand.
Gold has started February in very positive fashion, as Chinese Official manufacturing PMI printed at its lowest since Aug'12, bolstering safe haven bids in the yellow metal. Furthermore, the poor official figures offset better than expected Caixin PMI data, which still came in below 50, thus demonstrating contraction, highlighting the weak outlook for the global economy which has had a knock on effect in the base metals. Copper on the LME trades in negative territory this morning and It's a similar story for other base metals, whose prices are consolidating some of Fridays BoJ inspired gains.
Following a busy day of global PMIs, today on the US calendar we’ll get the December core and deflator PCE data along with personal income and spending, manufacturing PMI, construction spending and the important ISM manufacturing and prices paid.
Bulletin Headline Summary from RanSquawk and Bloomberg
- European equities trade mostly in the red following sentiment brought about by the release of soft Chinese Official manufacturing PMI data
- Oil trades lower in the European morning, with the ongoing production-cut saga still dominating price action in the market, however Brent and WTI hold the USD 35.00 and USD 33.00 handles respectively
- Looking ahead highlights include: US ISM and PMI Manufacturing data with pre-market earnings from Sysco and Cardinal Health
- Treasuries fall slightly in overnight trading as world equity markets mostly drop; today’s economic data brings personal income/spending, ISM.
- China’s official factory gauge signaled a record sixth straight month of deterioration, raising the stakes for policy makers struggling to prop up the economy amid a second bear market in stocks since June and a currency at a five-year low
- Currency interventions don’t work. That’s the gist of what the economist community is saying after Sweden’s central bank ratcheted up warnings that it may intentionally weaken the krona as it tries to spur inflation
- Factories in the euro area slashed prices of goods by the most in a year in January, highlighting the deflationary risks that’s keeping alarm bells ringing at the European Central Bank
- HSBC will impose a global hiring and pay freeze as part of its drive to cut as much as $5 billion in costs by the end of 2017. The measures will affect the consumer and investment banking businesses
- Italy’s plan to use securitization to help relieve banks of their soured loans is an attempt to imbue securities backed by non-performing assets with some of the luster enjoyed by sovereign bonds, according to a senior official at the Treasury
- Japanese banks extended losses in Tokyo following the central bank’s surprise move to start charging lenders for some of their deposits held at the institution
- The central bank’s surprise move to negative interest rates on Jan. 29 could boost Japanese domestic demand, while the weaker currency that’s likely to result from the policy is a boon for exporters
- Nigeria’s government is in talks for concessionary loans worth $3.5 billion from the World Bank and African Development Bank to help finance a planned record budget this year, Finance Minister Kemi Adeosun said
- Iowans will have their say tonight on who should be the next U.S. president. Donald Trump (Republican) and Hillary Clinton (Democrat) leading narrowly in a Bloomberg Politics/Des Moines Register Iowa Poll released over the weekend
- Sovereign 10Y bond yields little changed. Asian, European stocks mostly lower; U.S. equity-index futures drop. Crude oil and copper drop, gold rallies
US Event Calendar
- 8:30am: Personal Income, Dec., est. 0.2% (prior 0.3%)
- Personal Spending, Dec., est. 0.1% (prior 0.3%)
- Real Personal Spending, Dec., est. 0.2% (prior 0.3%)
- PCE Deflator m/m, Dec., est. 0% (prior 0%)
- PCE Deflator y/y, Dec., est. 0.6% (prior 0.4%)
- PCE Core m/m, Dec., est. 0.1% (prior 0.1%)
- PCE Core y/y, Dec., 1.4% (prior 1.3%)
- 9:45am: Markit US Manufacturing PMI, Jan. F, est. 52.7 (prior 52.7)
- 10:00am: ISM Manufacturing, Jan., est. 48.2 (prior 48.2)
- ISM Prices Paid, Jan., est. 35 (prior 33.5)
- ISM New Orders, Jan. (prior 49.2)
- 10:00am: Construction Spending m/m, Dec., est. 0.6% (prior -0.4%)
- 11:00am: ECB’s Draghi speaks at EU Parliament
- 1:00pm: Fed’s Fischer speaks in New York
Top Global News
- Barclays, Credit Suisse Agree to Dark Pools Settlements: Barclays will pay $70m, split evenly between SEC and New York the largest fine levied on a dark pool operator, Credit Suisse will pay $84.3m
- Clinton, Trump Face First Real Test as Iowans Head to Caucuses
- Record China Factory Gauge Slump Adds to Monetary Policy Dilemma: Manufacturing PMI fell to 3-yr low of 49.4 in Jan.
- HSBC to Freeze Hiring, Salaries in 2016 Amid Cost Reductions: CEO Stuart Gulliver is seeking $5b in savings by 2017
- Google Defends U.K. Tax Accord as Legal, Not ‘Sweetheart Deal:’ U.K. business chief says deal will change corporate behavior
- Symantec Completes Veritas Sale, Adds $2b to Capital Return Plan: Said it received ~$5.3b in after-tax cash proceeds from completion of Veritas sale
- Oil Bulls Jump in at Fastest Pace in Five Years on Rebound Hopes: Net-long position jumped 35% through Jan. 26: CFTC
- Global Yields Hit 12-Month Low With Japan 2-Year at Minus 0.16%: Yield on a Bank of America index of sovereign bonds dropped to 1.39%, the least since February 2015
- Bond-Market Inflationistas Say They’re No Fools as Losses Mount: Goldman sees inflation headed higher, recommends 10-yr TIPS
- Marissa Mayer to Make Case That Yahoo Can Be Turned Around: CEO to detail new initiatives this week as proxy fight looms
- Yahoo’s Marissa Mayer Said Not Planning to Leave Co.: NYP
- February the Longest Month for Investors Awaiting Central Banks: U.S., Japan, euro zone have no Feb. central bank meetings
- ‘Kung Fu Panda 3’ Tops Weekend Box Office With $41m: Disney’s “The Finest Hours” opened in 4th place and the Open Road Films parody “Fifty Shades of Black” landed in ninth
- IEX Debate Escalates With Public Knock to NYSE’s Systems: IEX posts letter saying NYSE has a ‘speed bump’ of its own
- RCS Capital Files for Bankruptcy as Previously Announced: Company has said it will borrow $150m for restructuring
- Blackstone Said to Shop Pactera Technology for Up to $1b: WSJ
- FTC Review of TEVA/AGN Seen Closing in 2-3 Weeks: DealReporter
- Sports Authority Confirms It Cut About 100 Jobs at Headquarters
DB's Jim Reid concludes the overnight wrap
We’re straight to Japan this morning where the BoJ fuelled rally has extended for a second day with the Nikkei and Topix both up 2% in early trading. The Yen is more or less unchanged around 121.2. Japan aside though, it’s been a broadly mixed start for the rest of Asia however. The Hang Seng (-0.42%) and Shanghai Comp (-1.03%) in particular are trading with a much weaker tone, in part reflecting some more soft data out of China. The January manufacturing PMI has printed at 49.4 - a three year low - which was below expectations of 49.6 and also down from 49.7 in December to mark the sixth consecutive sub-50 print. The non-official Caixin PMI was also weak at 48.4, albeit up 0.2pts from the prior month. Meanwhile, the non-manufacturing PMI has printed at 53.5, down 0.9pts from December. Elsewhere this morning we’ve seen the ASX gain +0.75% while the Kospi is slightly firmer. Credit indices are around a basis point wider while Oil markets are currently down 1.5%.
So Japan's decision to cut rates into negative territory must surely have increased the probabilities of an easier bias to rates across the globe. I've long been of the opinion that the US will have to do more QE again in the next downturn and that we could still be in the early stages of a global money printing era. While I still think this, it's possible that the recent international trend to negative rates will also be a big theme on and off in the years ahead. I'm no expert on the functioning of the US money market but it seems inevitable that the FED will also have to consider such a policy in the future. If growth continues to be structurally low and their peers are in negative rate territory they may have little choice. The FED's dot plot forecasts certainly look stratospheric at the moment.
Speaking of which, it’s hard to imagine that the Q4 GDP report we got on Friday will do much to help the FED’s case. The +0.7% qoq saar print was slightly softer relative to expectations of +0.8% but more importantly was a strong signal of significant further deterioration in underlying demand with our US economists highlighting that the most troubling aspect was the lack of any meaningful inventory liquidation. With demand slowing and the latter elevated, our colleagues highlight further downside risks through the first half of this year as stockpiles become unwound, with the danger being that real GDP growth falls below last quarter’s meager rate. Meanwhile the data confirmed just a +2.9% yoy gain for nominal GDP last quarter which was 0.1% higher than the forecast we had in our chart on Friday. The reading confirmed however that for just the third time since 1955 covering 118 hikes, the Fed raised rates in a quarter where nominal GDP growth on a yoy basis was below 4.5%. The other two occasions were also statistical anomalies that were corrected in the subsequent quarters. See Friday's EMR for the chart.
Friday’s price action was already being dictated by the BoJ however with the fall in global yields being a notable feature. 10y Bund yields finished nearly 8bps lower at 0.323% which is the lowest now since last May. 10y Treasury yields closed nearly 6bps lower and at 1.922%, finished at the lowest closing yield since April last year. The rally for risk assets saw the S&P 500 finish up +2.48% which helped to cap a second consecutive weekly gain in the process. European equities were up similar amounts (Stoxx 600 +2.20%) too while the better tone for risk was also helped by a decent finish to the week for Oil markets. WTI closed +1.20% at $33.62/bbl meaning it was up nearly +4.5% last week, but well over 20% from the low’s on the 20th of last month. The more impressive move has been in Brent however which was up +3.42% alone on Friday (to $35.99/bbl) and +9.5% over the five days last week (although both have weakened some 2% this morning).
In fact, Brent has closed higher on seven of the last nine trading days as rumblings around potential OPEC production cuts added to the positive sentiment generated from a dovish ECB and BoJ. As the US earnings season rumbles along however we’re gently reminded of the pain that is already evident at a micro level, with Chevron the latest big name to report. The oil giant reported its first quarterly loss since 2002 last quarter after posting weaker than expected earnings, while the company looks set to undergo a second bumper wave of job layoffs and capex cuts. Updating where we are with earnings season now, 201 S&P 500 companies have now reported their latest quarterlies with the current trend being 80% beating earnings guidance (which have been heavily beaten down) but just 48% beating revenue guidance. The latter continues to hover around the top end of recent quarterly trends however at 44%, 49% and 48% for Q3, Q2 and Q1 last year, however the number of positive earnings surprises is better than what we’ve recently seen at 74%, 75% and 73% respectively in the same time.
Wrapping up the rest of Friday’s data. While the latest GDP data failed to meet expectations, both Q4 ECI (+0.6% qoq) and Core PCE (1.2% qoq) printed in line with consensus estimates. The December advance goods trade deficit widened slightly to $61.5bn while the final January reading for the University of Michigan consumer sentiment print was revised down 1.3pts to 92.0 after the expectations print fell 3pts relative to December. Just to add some confusion to the data, the Chicago PMI printed at 55.6 on Friday which was well ahead of expectations of 45.3 and 12.7pts higher than the December reading. It was in fact the highest level in 12 months.
Meanwhile the first Fedspeak since the FOMC meeting last week saw San Francisco Fed President Williams acknowledge that he now sees slightly slower growth and inflation, along with slightly higher unemployment this year which argues for ‘just a smidgen slower process of normalizing rates’.
In terms of Fedspeak this week we’ve Fischer due to talk tonight and George scheduled to speak tomorrow evening. The other big focus of the week will of course be on the corporate earnings with 119 S&P 500 companies set to report with the highlights including Alphabet, Exxon Mobil, Pfizer, Merck and Kraft Heinz. Over in Europe meanwhile we’ve got 75 Stoxx 600 companies set to report their latest quarterlies including Royal Dutch Shell, GlaxoSmithKline and BP.