Once again there has been little fundamental news or economic data this morning in Europe with price action largely driven by expiring option contracts. In terms of key events, Putin says Russia should refrain from retaliating against US sanctions for now even as Bank Rossiya discovered Visa and MasterCard have stopped servicing its cards, and as Putin further added he would have his salary sent to the sanctioned bank – the farce will go on. Continuing the amusing “rating agency” news following yesterday’s policy warning by S&P and Fitch on Russian debt (was that a phone call from Geithner… or directly from Obama), Fitch affirmed United States at AAA; outlook revised to stable from negative, adding that the US has greater debt tolerance than AAA peers. Perhaps thje most notable move was in Chinese stocks which rallied overnight after major domestic banks said to have stopped selling trust products which were blamed for encouraging reckless borrowing and diluted credit standards. Speculation of further stimulus and the potential introduction of single stock futures also helped the Shanghai Comp mark its biggest gain of 2014 closing up 2.7%.
Despite expectations to the contrary, EM held up better than expectations yesterday. Indeed, some hoped that January’s selloff had strengthened EM positioning and valuations to better withstand a shift in Fed policy. Meanwhile other theories suggested that EM faces a delayed reaction to the Fed’s policy shift, much like January’s selloff came a month after the Fed’s taper announcement in December. Either way, a number of EMFX bellwethers including the BRL, MXN and TRY appreciated by 0.9%, 0.2% and 0.5% respectively against the USD yesterday. Rates markets were generally about 5- 10bp weaker across the board while EM sovereign credits were also wider. In Turkey, Prime Minister Erdogan surprised many by vowing to block access to Twitter immediately for national security reasons.
Turning to the day ahead, there’s not a lot on the data docket but the focus will be on speeches from four Fed officials which are the first speakers from the Fed since Wednesday’s FOMC. Perhaps we’ll get a clarification or elaboration of the Fed’s message from Wednesday. Bullard speaks on a Brookings Panel on the topic of nominal GDP. Fisher discusses the pros and cons of forward guidance. Kocherlakota and Stein will be speaking in Washington on monetary policy.
EU & UK Headlines
Little European news flow however analysts at Barclays believe that there is a risk of hawkish surprises from the BoE with any upside surprises in data could very well cause the timing of the first hike to get pulled forward.
US Headlines
Fitch affirmed United States at AAA; outlook revised to stable from negative, adding that the US has greater debt tolerance than AAA peers.
Analysts at Goldman Sachs still believe a hike to the Federal Funds rate is far off, noting that Yellen did not mean to send a strong signal on the shift in the reaction function. GS central forecast for the first hike remains early 2016, with risks of an earlier hike.
Equities
Stocks are seen higher across the board, with basic materials and telecommunications outperforming, although there was lack of tier 1 macroeconomic data releases or fresh macroeconomic news flow. Of note, German DAX index outperformed its peers, with Commerzbank leading the move higher following a positive broker recommendation by Morgan Stanley, with the bank also stating this morning that its 2013 capital target was reached.
In the US, the quarterly rebalance affects the S&P 500, S&P MidCap 400, and S&P SmallCap 600 indices.
Today also sees quadruple witching in the US, with the expiration of equity index futures, equity index options, stock options and single stock futures.
FX
AUD/USD edged up overnight and in Europe this morning towards its 200DMA line, supported by recovering gold prices as market participants looked to take advantage of weakness in spot prices throughout the week. Elsewhere, EUR/USD and GBP/USD are seen in minor positive territory, benefiting from a weaker USD amid profit taking following Yellen inspired gains. USD/CNY traded above its old 1% band for the third consecutive day printing a 13 month high. Analysts are now suggesting 6.25, rather than 6.20, is a key level to watch now that USD/CNY has traded above 6.20 for a number of days with little fall out from structured product unwinds.
Commodities
German Chancellor Merkel says EU leaders asked European Commission to prepare for possible broad economic sanctions against Russia over Crimea.This follows similar actions by Obama yesterday, who was preparing a bill for Congress on sanctions against ‘key sectors’ of the Russian economy. (BBG/RANsquawk) However Russian President Putin says Russia should not use retaliatory sanctions yet.
– Energy and precious metal prices, in particular palladium advanced to its highest level since September 2011 on fears that sanctions imposed on Russia will hamper exports channels. (Of note, Russia provided 41% of global palladium supply)
CME group said yesterday it is to launch shorter-term weekly energy options in April, in a bid to boost trading volumes. (RTRS)
Goldman Sachs says accelerating US growth to send gold price lower.
The Full Overnight Recap from DB’s Jim Reid
On Wednesday it felt a bit like the Fed had removed a support post from the market with the conclusion of the FOMC meeting but yesterday stronger data went some way to ease concerns about a potentially more hawkish Fed. This story will run and run with the Fed seemingly now in play again from a traditional policy point of view and maybe we will get a bit more market volatility to data now that the Fed has shifted away from quantitative thresholds. Within DB there is a school of thought that the Fed wasn’t actually as hawkish as has been made out but have indeed been fairly consistent in their views. Instead the argument goes that the market had perhaps become overly sanguine in recent weeks. Others think there were discrepancies between the statement, the press conference and the dots which might need ironing out by Fed speak which as you’ll see at the end starts again today with a few members appearing in public. We still think the Fed will find it much harder than it thinks to raise rates but with US data likely to now start seeing payback from the weather we could get a few months where the Fed’s own expected path seems rational. We may not know the true health of the US economy until the summer.
After underperforming Europe and the US yesterday, Asian equity markets are trading with a firmer tone this morning but volumes are on the low side with Japanese markets closed for holidays. Despite the better tone, sentiment remains fairly sensitive to the news flow from China. Chinese listed property developers are again outperforming (Shanghai Property equity index +3.1% vs Shanghai Comp +2.0%) after news that the Chinese securities regulator is reviewing the share-sale applications for three additional property developers. This comes after news that the regulator had approved share-sale applications for two developers yesterday. This is increasing optimism onshore that the government’s tightening stance on the sector may be coming to an end. In contrast, perhaps in a sign of the authorities’ stricter approach to the country’s trust sector, two of China’s biggest four banks (ICBC and CCB) are said to have halted selling trust products to third parties according to local media reports (Securities Journal, 21C Business Herald). This will only serve to tighten liquidity that flows to this sector. On a similar theme, we wrote yesterday that Shanxi-based steelmaker Highsee Group was the latest in a line of Chinese corporates reportedly getting into distress after the company failed to meet a RMB3bn bank loan repayment last week. It seems that the story has gotten more airplay overnight and local media are reporting that the company’s furnaces have already been shuttered and employees have not been paid (21st Century Biz Herald). It’s likely these kind of stories will continue to pop up in China this year reflecting tougher funding conditions for a number of sectors.
Coming back to yesterday, equities got a boost as the US session started helped by better than expected US data in the form of initial jobless claims (320k vs 322k expected) and the Philly Fed survey (9.0 vs 3.2 expected). More broadly the Bloomberg US Economic Surprise index has shown a steady improvement in March since bottoming out in February. DB’s Joe Lavorgna thinks that early March US data has been encouraging enough (particularly in the labour market) for him to revise up his March payrolls forecast to +275k from +225k previously. The S&P 500 ended up closing near the highs of +0.6%, leaving it within striking distance of March 7th’s record high of 1878.
Yesterday’s rally in equities was also driven by strong performance in the US banks. After the market close, the Fed published the results of its annual bank stress tests. All but one of the 30 US banks tested met or exceeded the Fed’s minimum capital targets under various scenarios. Under a severe adverse scenario, Zions Bancorp was the only bank with T1 capital below 5%, but the bank said that it would resubmit its capital plan after selling some CDOs to reduce risk. A number of bulge bracket banking stocks were up 2-3% in aftermarket trading. Also happening after market, Fitch affirmed the US’ AAA rating and took its rating outlook off watch negative to stable. Fitch cited that there has been stronger fiscal consolidation and signs of coherent economic policymaking.
In fixed income, European rates were weaker across the board as they reacted to Wednesday’s FOMC. Gilts, bunds and BTPs added 7bp, 5bp and 3bp respectively. US 10yr yields were relatively stable, adding 0.3bp, but weakening marginally following the US data. The front end of the UST curve was relatively stable (compared to Wednesday post-FOMC) and bear flattener trades have done well in the last 24 hours. As expected the post-FOMC analysis was a major discussion point for markets yesterday. On this topic, the WSJ said that Yellen’s first FOMC as Fed Chair highlighted the challenge that she faces in maintaining consensus on the Committee, highlighting the differences between some of her statements and the “dots” representing individual Fed official’s rate projections. Perhaps indicative of Yellen’s consensus building approach, the WSJ’s Fed-watcher Jon Hilsenrath noted that Yellen used the word “committee” 58 times in her one-hour news conference, more often than she uttered the words inflation, unemployment or economy. An additional 27 times she referred to the informal name of the Fed’s policy committee, FOMC, short for Federal Open Market Committee. Her predecessor, Ben Bernanke, by contrast, referred to the committee 24 times and to the FOMC 10 times in his last news conference in December (WSJ).
Despite expectations to the contrary, EM held up better than expectations yesterday. Indeed, some hoped that January’s selloff had strengthened EM positioning and valuations to better withstand a shift in Fed policy. Meanwhile other theories suggested that EM faces a delayed reaction to the Fed’s policy shift, much like January’s selloff came a month after the Fed’s taper announcement in December. Either way, a number of EMFX bellwhethers including the BRL, MXN and TRY appreciated by 0.9%, 0.2% and 0.5% respectively against the USD yesterday. Rates markets were generally about 5- 10bp weaker across the board while EM sovereign credits were also wider. In Turkey, Prime Minister Erdogan surprised many by vowing to block access to Twitter immediately for national security reasons.
Despite some negative headlines yesterday, Russian equities powered into the close to finish at +0.11% but Russian credit underperformed (5yr CDS +8bp) after S&P changed the country’s BBB rating outlook to negative from stable on geopolitical concerns. Fitch also changed its Russian rating outlook to negative overnight. In terms of the politics, both the EU and US yesterday announced expanded sanctions against Russian individuals. Reacting to the US actions, Russia’s Foreign Ministry published a reciprocal sanctions list of US citizens including a number of leaders of Congress. The EU also cancelled the upcoming EU-Russia summit, along with other bilateral summits. Merkel added that the EU was ready to start stage three sanctions against Russia if there is further escalation in the Ukraine. This came after Russia’s Foreign Minister Lavrov claimed that he was concerned over “numerous violations” of the rights of ethnic Russians in eastern Ukraine and the Ukrainian government said that it was preparing to defend the east using military means.
Turning to the day ahead, there’s not a lot on the data docket but the focus will be on speeches from four Fed officials which are the first speakers from the Fed since Wednesday’s FOMC. Perhaps we’ll get a clarification or elaboration of the Fed’s message from Wednesday. Bullard speaks on a Brookings Panel on the topic of nominal GDP. Fisher discusses the pros and cons of forward guidance. Kocherlakota and Stein will be speaking in Washington on monetary policy.
via Zero Hedge http://ift.tt/1h0DI6G Tyler Durden