Futures Flat With All Eyes On ECB’s Mario Draghi, Who Will Promise Much And “Probably Do Nothing”

With last night’s latest Japanese flash crash firmly forgotten until the next time the trapdoor trade springs open and swallows a whole lot of momentum chasing Virtu vacuum tubes, it is time to look from east to west, Frankfurt to be precise, where in 45 minutes the ECB may or may not say something of importance. As Deutsche Bank comments, “Today is the most important day since…. well the last important day as the ECB hosts its widely anticipated monthly meeting.” Whilst not many expect concrete action, the success will be judged on how much Draghi hints at much more future action whilst actually probably doing nothing.

Between June and September the ECB seemed like it was catching up with the curve that many feel it is behind. However last month’s press conference saw many disappointed at Draghi with the feeling he was back-tracking on prior dovishness. Indeed many feel his performance last month contributed to the large falls in markets over the following week so the stakes are fairly high.

As a reminder, Reuters previously reported that “At least seven and possibly as many as 10 of the 24 council members are against U.S.-style quantitative easing.” The article pointed to deep disharmony and there are bound to be questions about it today in the Q&A.

As a result, European equities started the session off on a cautious note, as participants sit on the side-lines ahead of the widely anticipated ECB meeting, with a mixed batch of German earnings failing to provide the DAX with any further direction. This morning saw a host of earnings reports which have dictated the state of play in stock-specific moves, with UK supermarket Morrisons (+8.6%) helping to boost the UK retail sector and German sports maker Adidas (+4.5%) helping provide the DAX with some support as they look to target their troubled Russian and golf units. Elsewhere, fixed income markets remain relatively unmoved despite the modest softness in stocks, with volumes particularly thin ahead of ECB Draghi’s press conference. Nonetheless, Spanish paper was provided some reprieve following a strong triple-tranche auction with all b/c higher than previous and average yields lower than previous. However, the French Tresor failed to endure the same fate as their offering was poorly received by the market and sent their benchmark 10yr lower by 45 ticks.

Looking at Asian markets this morning the Nikkei has been particularly volatile, trading up as much 0.5% to pare back all those gains and trade -0.8% at time of writing. The Yen has reflected this move to trade up against the Dollar having previously hit a seven year low. Elsewhere markets are weaker with bourses in Hong Kong, China and Australia modestly down, the latter reported labour data relatively in line with expectations. Quickly looking at the micro, Bank of China’s debut Basel-III compliant US Dollar deal has closed with the $3bn bond deal attracting $18bn of orders for the 10-year maturity notes.

FX markets have been the main source of focus given the overnight movements in the USD-index. More specifically, JPY initially came under significant selling pressure with USD/JPY breaking above 115.00 for the first time since December 2007, while EUR/JPY surged to a 10-month high and GBP/JPY traded at October 2008 levels. However, the JPY sell-off was then abruptly unwound as major JPY crosses dropped over 1 point across the board to trade relatively flat, attributed to widening spreads and a paucity of orders. Elsewhere, AUD saw some whipsaw price action overnight following the Australian jobs report, as the better than Exp. job gains figure was shrugged off as participants focused on the unemployment rate; highest since September 2002. Furthermore, the RUB sits at record lows against the USD once again after the Russian central bank altered their intervention policy yesterday.

In terms of the day ahead and aside from the focus on the ECB today, participants look at the weekly US jobs report and the EIA natural gas storage change figure. Finally the Fed’s Evans will be speaking publically in Chicago so we will be keeping an eye for any interesting remarks to come out of that.

Bulletin Highlight Summary from RanSquawk and Bloomberg

European participants hold fire as markets await the latest policy announcements from the ECB, with focus on the central bank’s response to the continuing fall in long-term inflation expectations.
FX markets continue to be dominated by movements in the USD-index, with USD/JPY seeing an abrupt sell-off overnight as investors book profits.
Participants look ahead to the stream of upcoming risk events which include the BoE and ECB rate decisions, the weekly US jobs report and the EIA natural gas storage change figure.
Treasuries gain before ECB rate decision and Draghi press conference; October nonfarm payrolls tomorrow, est. 225k, unemployment rate holding at
5.9%.
Two years after he corralled policy makers to back his plan to save the euro, Draghi is struggling to galvanize similar support for more stimulus to rescue the region’s economy
Draghi will probably insist at press conference that he can overcome divisions on the Governing Council as officials prepare their final forecasts in 2014
China’s central bank has published details on its latest tool to provide liquidity as it refrains from across-the- board cuts to benchmark interest rates
Traders raised expectations for currency price swings to the highest in more than a year as an unexpected stimulus boost from the Bank of Japan roiled markets and prompted speculation its European counterpart will respond
Obama and Senate Republican leader Mitch McConnell promised Americans yesterday they’d search for common ground, then fired the opening salvos of a new battle over immigration
Republican Senator Rand Paul yesterday tied Hillary Clinton to Democratic losses in the midterm elections, tweeting with the hashtag “HILLARYSLOSERS” as an opening shot in the 2016 presidential contest
New York City said it is monitoring 357 individuals for symptoms of Ebola; most are people who arrived in the city from Ebola-affected countries
Phil Rudd, drummer for AC/DC, has been charged in New Zealand with attempting to procure a murder; Rudd appeared in Tauranga District Court today on the charge and has been bailed until his next appearance on Nov. 27, a court official said
Sovereign yields mostly lower. Nikkei -0.9%, Shanghai +0.3%. European stocks, U.S. equity-index futures fall. Brent crude and copper lower, gold slides 0.4%

US Event Calendar

7:30am: Challenger Job Cuts y/y, Oct. (prior -24.4%)
7:30am: RBC Consumer Outlook Index, Nov. (prior 53.2)
8:30am: Initial Jobless Claims, Nov. 1, est. 285k (prior 287k)
Continuing Claims, Oct. 25, est. 2.363m (prior 2.384m)
8:30am: Non-farm Productivity, 3Q preliminary, est. 1.5% (prior 2.3%); Unit Labor Costs, 3Q, est. 0.5% (prior -0.1%)
9:45am: Bloomberg Consumer Comfort, Nov. 2 (prior 37.2) Central Banks

Central Banks

7:00am: Bank of England seen maintaining 0.5% bank rate
7:45am: European Central Bank seen maintaining 0.05% benchmark rate, -0.2% deposit facility rate, 0.3% marginal lending facility
8:30am: ECB’s Draghi holds news conference in Frankfurt
10:40am: Fed’s Evans speaks in Chicago
1:30pm: Fed’s Powell speaks in Chicago
7:05pm: Fed’s Mester speaks in New York
7:30pm: Reserve Bank of Australia issues monetary policy statement

FIXED INCOME & EQUITIES

European equities started the session off on a cautious note, as participants sit on the side-lines ahead of the widely anticipated ECB meeting, with a mixed batch of German earnings failing to provide the DAX with any further direction. This morning saw a host of earnings reports which have dictated the state of play in stock-specific moves, with UK supermarket Morrisons (+8.6%) helping to boost the UK retail sector and German sports maker Adidas (+4.5%) helping provide the DAX with some support as they look to target their troubled Russian and golf units. Elsewhere, fixed income markets remain relatively unmoved despite the modest softness in stocks, with volumes particularly thin ahead of ECB Draghi’s press conference. Nonetheless, Spanish paper was provided some reprieve following a strong triple-tranche auction with all b/c higher than previous and average yields lower than previous. However, the French Tresor failed to endure the same fate as their offering was poorly received by the market and sent their benchmark 10yr lower by 45 ticks.

COMMODITIES

Elsewhere, commodity markets remain relatively subdued with precious metals markets largely tracking movements in the USD-index which has since recovered some of its overnight losses. In a similar vein, the energy complex resides in relatively neutral territory as participants now look ahead to the stream of upcoming risk events which include the BoE and ECB rate decisions, the weekly US jobs report and the EIA natural gas storage change figure. In energy specific news, the WSJ writes that the US ban on oil exports is showing signs of easing with BHP Billiton due to sell around USD 50mln of ultralight oil from Texas to foreign buyers without formal government approval.

* * *

DB’s Jim Reid concludes the overnight recap

Today is the most important day since…. well the last important day as the ECB hosts its widely anticipated monthly meeting. Whilst not many expect concrete action, the success will be judged on how much Draghi hints at much more future action whilst actually probably doing nothing. Between June and September the ECB seemed like it was catching up with the curve that many feel it is behind. However last month’s press conference saw many disappointed at Draghi with the feeling he was back-tracking on prior dovishness. Indeed many feel his performance last month contributed to the large falls in markets over the following week so the stakes are fairly high.

There really isn’t much to go on for today with no real concrete leaks in the press. However the past few weeks have seen a series of news articles coming out hinting at what might be on the minds on the ECB. First we had a Reuters report a couple of weeks back suggesting that the ECB is considering purchasing corporate bonds. This helped with the snapback in markets reinforcing the claim that the stakes are high and that markets are still heavily controlled by central bank actions. Then on Tuesday Reuters again influenced the market by highlighting internal problems the ECB is grappling with when it reported on dissent within the council as to the next steps for European monetary policy. As a reminder it suggested that, “At least seven and possibly as many as 10 of the 24 council members are against U.S.-style quantitative easing.” The article pointed to deep disharmony and there are bound to be questions about it today in the Q&A.

With so much in play, our European economists wrote in last week’s Focus Europe that, “Merely repeating the line that the Council remains unanimous in its commitment to other unconventional policies if necessary — that is, no escalation of rhetoric — would disappoint the market.? In terms of what might actually be mentioned today, our economists expect that, ‚at best … Draghi could only endorse corporate bond QE implicitly. He could re-introduce the phrase that the Council is ready to adjust the ‚size and composition? of asset purchases.?? In terms of public QE, they expect that, ‚Rather than acting early to maximize the impact of QE by surprising the market, we see the ECB delaying action to secure a broad enough consensus inside and outside the Council. As time passes, growth and inflation expectations should fall and market stress may rise … we expect public QE, but probably not until later in Q1.? Looking ahead one of their comments in particular stuck out from Focus Europe in light of this week’s Reuters ECB headlines – ‚In a perverse way, we need more stress to trigger a response.? So a difficult meeting today for Mr Draghi, especially if the Reuters story this week is to be believed.

European markets did have a strong day yesterday, helped by the previous day’s US market strength and then helped by stronger than expected Services PMI’s from Spain (55.9 vs 55.3 expected), Italy (50.8 vs 49.4 expected) and France (48.3 vs 48.1 expected) although the slightly disappointing German number (54.4 vs 54.8 expected) meant that the broader eurozone read came in at around expectations (52.3 vs 54.4 expected). The eurozone composite PMI also came in broadly in-line with expectation at 52.1. Over this side of the Channel, the UK Services and Composite PMI’s both disappointed at 56.2 and 55.8 respectively. In terms of market moves – the Stoxx 600 closed the day up +1.6%, led by the FTSE MIB (up +2.6%) and the CAC (up +1.9%). In credit, Main tightened by -1bp whilst Xover fell -10bps. In other European news yesterday Jean-Claude Juncker, the new President of the European Commission, held his first press conference where he announced that the Commission would be presenting proposals for a €300bn investment package to stimulate EU economy’s growth in December, three months earlier than expected, although few other details emerged.

Over in the US, data was mixed with a stronger than expected October ADP employment report (at +230k vs 220k expected) and a +12k upward revision to the previous read, an in-line US Services PMI (at 57.1) and a disappointing October non-manufacturing ISM of 57.1 (vs 58 expected). Diving into some of the details of the ISM, given we have payrolls on Friday, it was interesting to see how strong the ISM non-manufacturing employment sub component series was (rising to 59.6 from 58.5, its highest level since August 2005). Given this, as DB’s Chief US Economist Joe LaVorgna wrote in his comment yesterday, “employment subcomponent of the non-manufacturing ISM survey is loosely correlated with nonfarm payrolls.” So it seems fair to say that yesterday’s strong ADP and ISM employment series data have increased expectations for tomorrow’s NFP number. Joe is expecting a 225k print.

Staying on the US, the midterm elections went largely as expected with the Republicans gaining control of the Senate. Markets reacted positively, the S&P closing +0.6% with the view being that the newly elected Congress would implement something of a business friendly agenda including looser constraints on banks, plans to liberalize energy exports and support over new trade deals. Treasuries were modestly weaker whilst the Dollar continues to surge on with the DXY index +0.5% on the day to 87.44, the highest level since June 2010.

Looking at markets elsewhere, the Central Bank of Russia yesterday announced that they would allow for an effective free float of the rouble. The currency has depreciated significantly recently, losing more than a quarter of its value versus the dollar over the calendar year. The bank have stated that the currency will be determined ‘predominantly by market factors’ although will be subject to one-off interventions if needed.

Meanwhile oil rebounded yesterday as WTI and Brent rallied +1.3% and +0.5%. Sentiment turned around following the latest inventory data showing that stockpiles increased by less than expected last week which was further compounded with a reduction in Libyan output. Markets had also jumped earlier in the day following a report in the Wall Street Journal that news was circulating on Twitter that a pipeline had exploded in Saudi Arabia, with worries over possible terrorism, although the report was later thought not to be credible.

Taking a look at Asian markets this morning the Nikkei has been particularly volatile, trading up as much 0.5% to pare back all those gains and trade -0.8% at time of writing. The Yen has reflected this move to trade up against the Dollar having previously hit a seven year low. Elsewhere markets are weaker with bourses in Hong Kong, China and Australia modestly down, the latter reported labour data relatively in line with expectations. Quickly looking at the micro, Bank of China’s debut Basel-III compliant US Dollar deal has closed with the $3bn bond deal attracting $18bn of orders for the 10-year maturity notes.

Finally there was an interesting article in the FT yesterday reporting that China has proposed lifting some sanctions on foreign investment in the country. The plan is to reduce the number of sectors foreign companies are required to form JV’s with domestic businesses or are limited to minority stakes from 79 to 35 and in effect open up state-owned enterprises to private capital.

In terms of the day ahead and aside from the focus on the ECB today we’ve got factory orders in Germany to look forward to as well as retail PMI prints in Europe and the September industrial production print in the UK. This will then be followed up with the latest Bank of England monetary policy meeting although we expect little in the way of changes. Following up on yesterdays ADP reading we’ve got claims data in the US which our US team are anticipating to be similarly supportive of a healthy job market. Finally the Fed’s Evans will be speaking publically in Chicago so we will be keeping an eye for any interesting remarks to come out of that.

via Zero Hedge http://ift.tt/1sjaSEM Tyler Durden

Leave a Reply Cancel reply