iftttwall

We have joked about it in the past: with equities around the globe all correlating tick for tick with the price of oil (supposedly “lower oil is good for the economy”, just don’t tell that to the stock market), instead of doing piecemeal interventions and monetizing stocks, something which as even Citigroup has noted no longer works, what central banks should do instead is monetize the source of all market problems: oil itself.

We first joked last January that the ECB should do it…

ECB’S COEURE SAYS MONETARY POLICY MUST REACT TO INFLATION DROP. Time for ECB to monetize barrels of oil

— zerohedge (@zerohedge) January 8, 2015

… that the Fed should do it…

YELLEN: WE SAW SUBSTANTIAL PRESSURE ON OIL PRICES, COMMODITIES. Why doesn’t the Fed just monetize oil?

— zerohedge (@zerohedge) September 17, 2015

… and that Canada, arguably the one developed nation most impacted by plunging oil, should certainly do it.

Canada Should Triple Deficit Target to Spark Growth: David Rosenberg. Atually the BOC should just monetize oil: that will fix everything

— zerohedge (@zerohedge) January 4, 2016

Key word, however, in all of the above is “joked.” After all, by now most traders, and even the Davos billionaires, not only admit, but agree they have all had enough with central bank market rigging and manipulation.

Which is why we were almost surprised when none other than the WSJ proposed that, because “central banks have gone down the rabbit hole… starting with record low interest rates, then purchases of government bonds and mortgage bonds, ultra-accommodative policy progressed in Japan to buying real-estate investment trusts and equity funds” and because “in the looking-glass world of modern central banking, almost nothing is taboo, with even the abolition of cash discussed seriously by top monetary wonks” that it is time to make precisely this joke part of actual monetary policy.

The WSJ’s modest proposal: “the Bank of Japan should print money to buy oil. It sounds beyond nonsense. But with central bankers believing six impossible things before breakfast, it no longer seems inconceivable, which is informative in itself.”

The WSJ “explains”:

Consider the BOJ’s problem. The central bank is creating ¥80 trillion ($700 billion) a year to buy mainly government bonds, one of the biggest programs of money printing in history. It already owns almost a third of the bond market, nearly 2% of equities and about half of exchange-traded funds by value.

 

Nonetheless, Japanese inflation remains quiescent. The yen has been strengthening despite the negative rates introduced last month, making it even harder to push prices up toward the BOJ’s 2% target.

The logic behind the proposal is… fragile.

Because the BOJ keeps digging itself into an ever deeper hole, and because “negative rates have unpleasant side-effects, hurting banks, while bond supply may be limited” and because Japan’s QE is running out of bonds to monetize (something we have warned about since 2013), “over the next three years only ¥236 trillion of bonds could be available to buy because banks and insurance companies are reluctant to sell many of their holdings—making it hard to ramp up purchases further… HSBC says that in a worst-case scenario the BOJ would have trouble filling its monthly purchases later on this year”, it is time to throw something, anything at the wall, and hope it sticks.

To be sure, the WSJ admits there are even more idiotic ideas available “such as direct financing of government spending, or abolishing bank notes so interest rates can go deeply negative. None is politically palatable.”

But, it adds, “compared with these, creating money to buy oil has several big advantages.”

First, it allows the BOJ directly to weaken the currency without dangerous diplomatic repercussions. Oil is denominated in dollars, so yen have to be sold to finance the purchase. But the U.S. could hardly object to Japan importing more oil.

 

Second, purchases by the BOJ would push up the price of crude. Japanese consumers may not see that as a good thing, but investors are fixated on the oil price as a measure of whether to take risk or not. Crude has this year become central to everything from equities to government bonds and currencies, as traders take their cue from the oil price—with the safe-haven yen tending to strengthen when oil falls, as it did again on Tuesday. This market effect gives oil purchases additional power in weakening the yen, compared with buying bonds, and could be particularly powerful.

 

Third, Japan imports almost all its oil and has fewer days’ reserves than the average importer. Building new oil storage would support investment, too.

 

Fourth, it is easy to argue that now is a good time to buy oil, with the price down to a quarter of its 2008 peak. (Although Brent crude at $33 a barrel on Tuesday was not far below the 30-year median of $38 a barrel, adjusted for inflation.)

To be sure the proposal is idiotic on more than one level: as the WSJ admits, “there just isn’t enough oil in the world to help the BOJ print money on the scale it wants for very long. Oil is a big market; the extra supply expected from Iran is worth about $8 billion a year. But $1 billion is no longer the unit of account for central banking. While the total oil market is worth roughly $1.2 trillion a year, Japan can buy only a fraction of that—though of course the higher it pushes the oil price, the more it can spend.”

Picture that: a world which is running out of assets for central banks to buy with money they create out of thin aire.

Still, we are glad that the WSJ closes on a somewhat so(m)ber tone:

HSBC Chief Economist Stephen King says, the BOJ might eventually move from debating what else it can buy to asking whether these unconventional policies work at all.

And while we can’t help but laugh at all of the above, simply because it confirms the epic failure of central planning intervention, something we have railed against since March 2009, we agree with the following: “We have come to the point in Japanese monetary policy—and soon perhaps in the West—where it is hard to tell sense from nonsense.“

Indeed we have.

via Zero Hedge http://ift.tt/1Qg3rxB Tyler Durden

For a minute, Sharp was saved.

The 100-year-old maker of LCD screens was once a consumer electronics powerhouse but has stumbled in the face of fierce price competition and ill-advised investments in advanced production plants. Earlier this month, Sharp reported a net loss of $208 million for for its fiscal Q3, bringing the nine month loss to nearly a billion as the company continues to lose market share to Samsung, LG, and other Asian competitors.

Foxconn founder Terry Gou sees Sharp’s dire straits as an opportunity for Hon Hai Precision to solidify its position and pricing power with Apple, which is seen adopting OLED screens for iPhones by 2018. Sharp hopes to become a global OLED supplier.

“The OLED sector is virtually a monopoly right now,” Lisa Li, vice president of Sigma Intell says, referencing Samsung’s iron grip on the space. “This must be something Apple is pretty concerned about.”

“An iPhone’s most expensive component is its touch screen display, making up more than 20% of manufacturing costs, which is why Mr. Gou is eager to supply them,” WSJ writes. “Sharp is one of three suppliers of iPhone screens.” 

“It’s widely understood that Hon Hai wants to consolidate Sharp in order to secure its dominant position in Apple’s supply chain; the combined group could provide EMS services as well as displays, touch panels, camera modules, metal casings, FPCBs and connectors,” BNP remarked, in a note out last week.

Gou has had his eyes on Sharp since 2012, when a deal for Foxconn to take a 10% stake fell apart due in part to Sharp’s abysmal operating performance.

Foxconn’s latest overture would have seen Sharp issue shares worth something like $4.3 billion which Hon Hai would buy, giving the Taiwanese contract manufacturer a 66% stake in the Japanese company. As Bloomberg notes, “Foxconn would also put down a 100 billion yen deposit that Sharp can keep if the sale, which is contingent on shareholder approval, doesn’t go through.”

There were already all kinds of questions swirling around about whether Foxconn was thinking too much about Apple and too little about how it planned to turn around the loss-making machine that Sharp has become. Now, it looks like Hon Hai may have gotten cold feet after realizing what bad shape the Japanese company is actually in.

Just hours after Sharp’s board agreed to a takeover – which WSJ notes marked something of a coup as “Japan has been reluctant to let a major domestic company go into foreign hands, and many people had argued that the 103-year-old Sharp should go to a Japanese buyer” – Foxconn put the deal on ice by releasing the following rather amusing statement:

We acknowledge receipt of a notice today from Sharp’s Board choosing us as their preferred partner. After receiving new material information from Sharp yesterday morning, we have accordingly informed Sharp last night [before their board meeting on 2/25] that we will have to postpone any signing of a Definitive Agreement until we have arrived at a satisfactory understanding and resolution of the situation.

Yes, Hon Hai needs to “arrive at a satisfactory understanding of new material information,” which, according to sources means Foxconn got a look at Sharp’s contingent liabilities and didn’t like what it saw.

Specifically, Sharp sent over a 100-item list that adds up to ¥350 billion, just “slightly” more than the ¥17.2 billion in such items spelled out in the company’s 2015 annual report. As WSJ goes on to detail, the list includes everything from costs tied to buying raw materials for solar cells to EU antitrust litigation to North American civil suits.

If that sounds like a lot of potential headaches to you, you’re apparently on the same page as Gou. Sharp had no immediate comment.

Foxconn reportedly hopes to clear the matter up as soon as possible, but perhaps shareholders should hope they don’t. Sharp said today it was looking to allocate some of the funds from Foxconn’s investment to things like robots and “auto-related cameras.” How Foxconn intends to run this company while simultaneously operating its own business is still largely a mystery. “Foxconn doesn’t have any experience in any of Sharp’s businesses,” Jefferies analyst Atul Goyal says. “In fact, it creates large conflicts of interest with this acquisition.” 

Of course the biggest “conflict of interest” here may be the “conflict” that occurs when you merge an unprofitable company with a profitable one and that may indeed be part of the reason why Foxconn is thinking twice. 

We close with a bit more commentary from BNP (who just downgraded Hon Hai) on the proposed deal.

From BNP

There’s a historical context involved here. In 2012, Hon Hai first offered to invest in Sharp but the talks stumbled after the Sharp management’s fear of losing IP control as well as the concerns over leakage of key technology outside of Japan. Hon Hai has been widely regarded as a company that has focused on vertical integration in supply chain and aggressive in expanding its business beyond the assembly of consumer electronics products, by adding a wider bunch of components to its services. Hence, the market‘s view is largely that by acquiring Sharp, one of the world’s leading players of displays in electronics components, Hon Hai could gain more business from Apple and other customers including some Chinese companies. In our view, Hon Hai is targeting Sharp’s IP and advanced technologies in both small and large size display (LTPS and IGZO), which will likely further enhance Hon Hai’s competitive advantage and bargaining power. Yet, the market is currently speculating that Apple is likely to adopt AMOLED in future product, compared to its Korean peers-Samsung and LGD, Sharp’s AMOLED development is much slower. We concerned about Sharp’s position in Apple’s display supply chain in this increasingly tough competitive environment for small LCDs. Aside from panel, Sharp is currently a major supplier for Apple’s camera module. However, we are witnessing competition from Sony, Cowell or even ASE continues to rise. Additionally, we think there is limited upside for Hon Hai to further gain shares in Apple’s camera module business.

It would take time for Hon Hai to turn Sharp around and the restructuring process may be challenging, in our view. Hon Hai currently trade at c9x of our 2016 EPS estimate and c1x 2016 PBR. We foresee no share price upside catalyst in the following months due to its muted sales outlook and uncertainties around the proposed Sharp deal. We also think its 5% dividend yield may not be sustainable due to its aggressive M&A strategy. We view the porposed transaction will take time to monetize the potential synergies while the Sharp deal appears to be counter-intuitive to Hon Hai’s financial position and financial performance in short-to-mid-term. Given our earnings cuts on muted demand outlook and potential risk on Sharp deal, we downgrade Hon Hai to Hold from Buy with a new TP of TWD74 (from TWD92), based on 8.5x PE, the historical mid-to-low end range (down from 10x PE, the historical mid-range) as the uncertainties around the Sharp deal will likely drive a de-rating of the stock, in our view.

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

• Europe shrugs off pre-G20 China stocks slump, sterling steadies (Reuters)
• China Unveils Its Deliverables for G-20 — And No Plaza Pact (BBG)
• Foreign Money Could Be Slow to Enter China’s Bond Markets (WSJ)
• China Urged to Stomach Much Higher Fiscal Deficit (WSJ)
• Trump’s Momentum Has Republicans in Congress Confused and Cowed (BBG)
• Obama weighs Republican for Supreme Court (Reuters)
• Apple to boost customers’ iCloud encryption (FT)
• Sears Posts $580 Million Fourth-Quarter Loss as Retailer Shrinks (BBG)
• This Obscure Fed Funds Metric Might Explain Market Tumult (BBG)
• Trump rides momentum into winner-take-all states (Hill)
• China’s Shadow Banking Evolves to Dodge Crackdown (BBG)
• Best Buy’s quarterly revenue falls 4.1 pct (Reuters)
• China’s Uber Competitor Didi Kuaidi Planning to Raise About $1 Billion (WSJ)
• What a Saudi Oil-Supply Freeze Would Really Mean for Markets (BBG)
• U.S. Hedge Fund Elliott Faces Probe into Samsung Stake (WSJ)
• Supersized Currency on Europe’s Fringes Defies Big Banknote Clamor (BBG)
• Japan Pension Funds Spent $4.5 Billion on Local Stocks Last Week (BBG)
• U.S. Readies New North Korea Sanctions for UN Security Council (BBG)

 

Overnight Media Digest

WSJ

– Sharp Corp’s board approved a plan Thursday for Apple Inc. assembler Foxconn Technology Group to take over the company for ¥700 billion ($6.24 billion), people familiar with the situation said, in a rare case of Japan Inc relinquishing a venerated brand to a foreign buyer. (http://on.wsj.com/1RoUxNg)

– Boeing Co announced the sudden retirement of Chris Chadwick as head of its defense-and-space unit after just over two years leading the $30 billion-a-year business. (http://on.wsj.com/1oIQMsX)

– Didi Kuaidi Joint Co is planning to raise about $1 billion from investors on terms that would value the Chinese car-hailing company at more than $20 billion, according to people familiar with the situation. (http://on.wsj.com/1T6YJ80)

– A senior Goldman Sachs Group Inc banker who helped the Wall Street firm win business with embattled Malaysian state investment fund 1Malaysia Development Bhd has formally left the bank. (http://on.wsj.com/1QzpMBY)

 

FT

Deutsche Boerse AG Chief Executive Carsten Kengeter would run the day-to-day operations of a new company formed by a possible merger with the London Stock Exchange Group Plc, according to people familiar with the matter.

Airbus Group SE Chief Executive Tom Enders said in statement on Wednesday that he did not see how a combination of Honeywell International Inc and United Technologies Corp would be in his company’s interests.

UK-based institutional stock broking firm Panmure Gordon & Co Plc said its Chief Executive Phillip Wale had stepped down and left the company.

 

NYT

– Apple engineers have begun developing new security measures that would make it impossible for the government to break into a locked iPhone using methods similar to those now at the center of a court fight in California, according to people close to the company and security experts.(http://nyti.ms/1p6kyHU)

– John Gleeson, a prominent federal judge and former prosecutor who handled one of Wall Street’s biggest criminal cases, is set to become a partner at Debevoise & Plimpton, according to people briefed on the matter.(http://nyti.ms/21i0nbe)

– An advisory committee of the Commodity Futures Trading Commission has recommended that the regulator abandon its plans to limit the number of futures contracts a trader can hold on certain commodities, including oil and natural gas, according to a copy of the recommendation that was reviewed by The New York Times.(http://nyti.ms/21sDQoJ)

– A broad plan being put forward by the Treasury Department to ease Puerto Rico’s financial crisis would put pension payments to retirees ahead of payments to bondholders – a move that some experts fear could rattle the larger municipal bond market.(http://nyti.ms/20WiLRF)

 

Canada

THE GLOBE AND MAIL

** For the first time since the early 1980’s, Alberta is expected to have an economic slump that lasts for two years as low oil prices persist, and the province’s Finance Minister Joe Ceci warned of a “once-in-a-generation” challenge reflected in a provincial deficit that could top C$10.4 billion ($7.59 billion) next year. (http://bit.ly/1R3Cjhu)

NATIONAL POST

** Canada’s medical marijuana industry is being thrown into new turmoil by a court ruling that threatens to undercut its business model. Federal court judge Michael Phelan gave patients the right to grow their own cannabis, arguing the current system restricts access to the drug. (http://bit.ly/1R3Df5A)

** Health Canada is advising anyone who bought a natural health product claiming to treat cancer called Novodalin B17 to contact their doctor for a followup. The federal agency said it is an unauthorized product and that it does not permit cancer treatment claims to be made for natural health products. (http://bit.ly/1QfJ4gw)

 

Britain

The Times

* Mine chiefs face murder charges over dam burst

BHP Billiton legal woes have worsened after it emerged that executives at its Brazilian joint venture have been accused of murder by police over the Samarco disaster that killed 19 people. (http://thetim.es/1LGHceX)

* Deutsche Boerse to appoint German

Deutsche Boerse is expected to transfer its headquarters to London if it succeeds in merging with the London Stock Exchange. Carsten Kengeter, the chief executive of Deutsche Borse and a former senior Goldman Sachs banker, is expected to become boss of the exchange if the merger goes through. (http://thetim.es/1LGHcLO)

The Guardian

* IMF urges UK to ease austerity should economy slow further

The International Monetary Fund has urged the UK to ease back on austerity should the economy slow further, as it warned finance ministers at the G20 summit in Shanghai to boost public spending on infrastructure to fuel global growth. (http://bit.ly/1OvoXca)

* Ryanair to campaign against Brexit

Ryanair Holdings Plc is to actively campaign for Britain to remain in the EU, branding its planes with pro-Europe slogans, as it warned UK fares could rise after a vote to leave. The chief executive of the budget carrier said Europe had allowed Britons to enjoy affordable holidays through deregulating the airline industry, and that Ryanair would invest less in the UK if it were outside the EU. (http://bit.ly/1WJaKhF)

The Telegraph

* Tata Steel’s European boss Karl Koehler quits

Karl Koehler managing director of struggling Tata Steel Europe has quit as the company holds crunch talks with a potential buyer for large parts if its UK operations, a deal which could save thousands of British jobs if it goes ahead. (http://bit.ly/1Q1ZoDN)

* Cyber-crime set to hit most British companies in the next two years

The spread of cyber-fraud has created a surge in economic crime against British companies, with more than half of all firms braced for an online attack, according to new research. (http://bit.ly/1R2E7aw)

Sky News

* Car making sees best January for eight years

More than 137,000 cars were built in the UK last month in the best January performance for eight years, industry figures show. The Society of Motor Manufacturers and Traders said the industry had enjoyed a “strong start” to 2016, continuing its impressive performance in recent years. (http://bit.ly/1Umkb8d)

* Business leaders take sides in EU debate

Two of the country’s most outspoken business leaders have entered the debate on Britain’s future in the European Union – on opposing sides. Ryanair chief executive Michael O’Leary came out in support of a vote to stay while JD Wetherspoon founder Tim Martin explained why he wanted to leave.(http://bit.ly/1R2F1nz)

via Zero Hedge http://ift.tt/1S3mYT8 Tyler Durden

It’s just getting ridiculous: moments after the Euronext exchange broke down unexpected duo the “technical difficulties” shutting down “part of the market”, and spiking the Stoxx600 in the process, moments ago the NYSE itself decided to have a “technical glitch”, one which coming alongside James “QE4” Bullard’s CNBC interview has pushed S&P500 futures to their overnight highs.

From the NYSE

If and when the CME breaks next, we expect everything to lock limit up as only the upward momentum-levitating algos will be allowed to frontrun each other.

 

via Zero Hedge http://ift.tt/1Lf1qkT Tyler Durden

After a burst of volatility in the developed market over the past month, one odd outlier was China, where after a surge of gut-wrenching moves in both its currency and equity markets (recall that it was China’s troubles with marketwide circuit breakers at the start of January that may have catalyzed the global volatility wave), Chinese stocks remained relatively quiet and resilient, levitating quietly day after day. That all changed overnight when the Shanghai Composite plunged by 6.4% with the drop accelerating into the close. This was the biggest drop in over a month and was big enough to almost wipe out the entire 10% rebound from the January lows in one session.

 

There was confusion about what catalyzed the selling with several theories proposed.

According to one, the catalyst was a jump in money market rates: the overnight repo rate jumped as much as 33 bps which led to a tightening in financial conditions. The cash squeeze was caused by banks’ reserve submission and corp. tax payments for 2015 due this week: Commerzbank economist Zhou Hao

“Market confidence is very weak so an increase in money-market rates triggered a sell-off today,” said Wu Kan, a fund manager at JK Life Insurance Co. in Shanghai. “Technically speaking, the rebound has reached its target and a new round of declines is resuming. The valuations of smaller companies are still too high and that’s the basic reason behind the plunge. I am not too sure that the government will step in to buy stocks now.” Judging by the final result, he was right.

A second theory speculated that losses accelerated after regulators banned Zhongrong Life from adding to its equity investments, according to Castor Pang, head of research at Core-Pacific Yamaichi Hong Kong. “Zhongrong Life can’t add to holdings as its solvency ratios fall into criteria of insolvent insurers”, China’s Insurance Regulatory Commission said.

This is a problem because “the government is trying to make sure all insurance companies need to meet potential demand for claims from clients and keep liquidity ample,” says Pang. “But almost all insurers which heavily bought shares last year when the Shanghai Composite was at high levels” are facing problems. As a result, the latest black swan to appears in China in the form of Zhongrong Life’s situation, is fueling concern further selling pressure in stock market: Pang

“A big jump in Shanghai turnover implies investors turned risk averse and want to dump holdings en masse,” Pang says. “Investors are scared of further declines. The government may try to step in to calm investors’ nerves. It may help moderate losses but can’t reverse the trend.”

A third, far less credible theory postulated that stocks were tumbling on concerns that there may be negative news from the G-20 tomorrow. Since that would be patently impossible as the G-20’s only concern is to stabilize markets we would discount this idea.

Whatever the reason, it appears that Chinese stocks were just waiting for a catalyst to dump and they got it: “The market is in a quite fragile state when everyone scrambles for an exit,” said Central China Securities Co.’s Shanghai-based strategist Zhang Gang, who accurately predicted last year’s June selloff. “None of the news in the market is sufficient enough to trigger such a slump.”

* * *

Elsewhere in the world, the sentiment was initially of the risk-off variety, with treasuries rallying gold rose and crude oil falling after the Chinese rout. U.S. stock-index futures were little changed, while European equities advanced as banks rebounded.

As Bloomberg writes, global equities have swung between gains and losses in the past week as investors tried to get a handle on the world economy’s prospects. So far they are failing, and yet it is only massive short squeeze that manage to provide support under the increasingly jittery market. Crude’s gyrations and concern that China can’t regain momentum have dominated financial markets this year, spurring central banks to ponder further stimulus. U.S. Treasury Secretary Jacob Lew said Group-of-20 finance ministers wouldn’t deliver an “emergency response” to the market turmoil when they meet this week as we aren’t in a crisis environment.

“The conversation has shifted from an accelerating economy to one possibly falling into recession,” said Kully Samra, who manages U.K. clients for Charles Schwab Corp. in London. “Our outlook for the year is still good, but what happens over the next few days in the stock market depends on how much those worries intensify.”

At last check, S&P 500 futures were up 0.1%, to 1933, before data that is forecast to show durable goods orders expanded in January, while initial jobless claims increased in February.

Europe’s Stoxx 600 benchmark gauge of European equities added 1.4% before the Euronext broke as reported previously, a gain that has since jumped to 1.8% as the market remains broken: go figure. Lloyds rallied as much as 11 percent after raising its dividend, introducing a special payout and indicating it may have reached the end of charges for wrongly sold payment protection insurance that cost it 4 billion pounds ($5.58 billion) last year.

* * *

Looking at regional markets, Asian equity markets traded mixed, having shrugged off the positive lead from Wall St where gains in oil prices post-DoE spurred risk-on sentiment, with renewed Chinese concerns leading to the downbeat tone in the region. Nikkei 225 (+1.4%) traded in positive territory supported by JPY weakness. Elsewhere, ASX 200 (+0.1%) traded range-bound amid a mixed bag of earnings reports. While the Shanghai Comp (-6.4%) underperformed amid profit-taking and increasing money market rates with the overnight Shibor up 2.45%, subsequently signalling at tighter liquidity. Alongside this, a total of CNY 960b1n of reverse repurchase agreements are due to mature this week, again further squeezing liquidity. Finally, 10yr JGBs fell amid gains in riskier assets in Japan, while the latest securities transactions figures also showed foreign purchases of Japanese debt nearly halved. However, prices pulled off their worst levels following the 2yr note auction where the auction average yield declined to its lowest on record.

European equities are in the green (Euro Stoxx: +1.4%) paring some of yesterday’s gains after benefitting from the positive close and Wall St. and a spate of earnings this morning. Europe shrugged off the significant losses seen in China, to see financials and energy names outperform. Both these sectors were among the worst performers yesterday, so while much of the move could be put down to profit taking, financials have also benefitted from significant gains Lloyds (+9.0%) in the wake of their earnings, while energy names continue to see upside in tandem with WTI’s move higher during US hours.

In FX it has been a tight session in early London today, the pound halted its steepest decline in more than six years as data confirmed that the U.K. economy gained momentum at the end of last year. Australia’s dollar weakened for a third day, dropping 0.1 percent to 71.89 U.S. cents, after a government report showed businesses’ annual investment plans fell to the lowest level in nine years.

The sharp reversal in Wall Street adds to the conflicting signals in FX. Oil also turned sharply higher on what was a marginal miss in the DoE Crude build, so all points to a short squeeze in risk (in general), spelling some USD weakness against all currencies with the exception of the JPY. Early selling in USD/CAD saw us dip under 1.3700 as locals decided to cut their longs established at the lows. GBP continues to grind lower against the EUR, but Cable looks to be finding some support below 1.3900 for now. Larger EUR/USD support seen down in the 1.0950 area, but for now, pre 1.1000 is finding some bids coming in. USD/JPY has been very quiet around 112.00, with S&P futures more or less flat to give little away in the US session ahead.

In commodities, WTI crude initiall declined modestly on the day after gaining 0.9 percent on Wednesday following a massive API and a modest DOE inventory build; it has since regained all of its losses and was at last check green on the day. Stockpiles of gasoline in the U.S. fell 2.24 million barrels to 256.5 million, according to the Energy Information Administration, as demand climbed on pump prices near a seven-year low. American crude inventories, however, rose by 3.5 million barrels to an 86-year high of 507.6 million last week.

U.S. natural gas slipped for a third day, extending a decline from a two-month low, amid forecasts for a warmer weather. Futures for March delivery, which expire Thursday, fall as much as 2 percent to $1.742 a million British thermal units on the New York Mercantile Exchange.

Gold extended its biggest monthly advance in four years, on speculation that U.S. interest rates remaining lower for longer.

On today’s US calendar we have Initial (Exp 262K) and Continuing (Exp 2.273MM) jobless claims, as well as the latest durable goods report, the FHFA House Purchase Index, the latest Bloomberg Consumer Comfort report, and the Kansas Fed report. Speaking will be Fed’s Lockhart and SF Fed’s John Williams

Bulletin Headline Summary from Bloomberg and RanSquawk

• Shanghai Comp. slumped over 6% to post its largest loss in over a month amid increasing money market rates, consequently signalling tighter liquidity, alongside a bout of profit-taking.
• European equities shrugged off the losses in China to pare some of yesterday’s losses with strong earnings from Lloyds bolstering financial names.
• Looking ahead, highlights income US weekly jobs data, Durable Goods Orders, Fed’s Lockhart and Williams and ECB’s Linde.
• Treasuries higher in overnight trading as Chinese equities and oil slide lower; today’s data includes durable goods orders, and Treasury concludes this week’s auctions with sales of $28b 7Y notes, WI yield 1.50%, compares with 1.759% awarded in January.
• China’s stocks tumbled the most in a month as surging money- market rates signaled tighter liquidity and the offshore yuan declined for a fifth day. The Shanghai Composite Index sank 6.4% at the close
• China will allow domestic banks to issue up to 50 billion yuan ($7.7 billion) of asset-backed securities based on their non-performing loans, the first quota for such sales since 2008
• Lloyds Banking Group Plc surged after the lender increased its dividend payout and indicated it may have reached the end of charges for wrongly sold payment protection insurance that cost it £4 billion ($5.6 billion) last year
• Europe’s biggest banks face a stress test this year that will have no pass mark to identify capital shortfalls, a break from previous practice, because banks have emerged from the financial crisis, the European Banking Authority said
• Euro-area consumer prices rose 0.3%, less than the 0.4% initially estimated in January, increasing the pressure on the European Central Bank to take steps to sustain the region’s recovery
• The U.S. government has urged some of the nation’s largest banks to refrain from helping Russia sell bonds, according to people with knowledge of the situation, as helping the nation obtain foreign funding risks undermining sanctions
• Amid conversations about central bank policy and algorithmic trading, it was concerns about diminishing liquidity that dominated discussions this week at the TradeTech FX conference in Miami
• No IG corporates priced yesterday (YTD volume $256.9b) and no HY priced (YTD volume $11.375b)
  Sovereign 10Y bond yields mostly steady; European, Asian markets rise (except China); U.S. equity-index futures little changed. Crude oil falls, copper and gold rise

US Event Calendar

• 8:15am: Fed’s Lockhart speaks in Atlanta
• 8:30am: Initial Jobless Claims, Feb., est. 270k (prior 262k); Continuing Claims, Feb. 13, est. 2.253m (prior 2.273m)
• 8:30am: Durable Goods Orders, Jan. P, est. 2.9% (prior -5%)
  • Durables Ex Transportation, Jan. P, est. 0.3% (prior -1%)
  • Cap Goods Orders Non-def Ex Air, Jan. P, est. 1% (prior -4.3%)
  • Cap Goods Ship Non-def Ex Air, Jan. P, est. -0.5% (prior 0.2%)
• 9:00am: House Price Purchase Index q/q, 4Q (prior 1.3%)
  • FHFA House Price Index m/m, Dec., est. 0.5% (prior 0.5%)
• 9:45am: Bloomberg Consumer Comfort, Feb. 21 (prior 44.3)
• 11:00am: Kansas City Fed Mfg Activity, Feb., est. -6 (prior -9)
• 12:00pm: SF Fed’s Williams speaks in New York
• 1:00pm: U.S. to sell $28b 7Y notes

DB’s Jim Reid concludes the overnight wrap

Yesterday felt pretty bad in the European session again (Stoxx 600 -2.30%) but a turnaround in Oil actually helped lift the mood by the time the US closed (S&P 500 +0.44% after being as much as -1.60% at the earlier lows). Despite that positive momentum for risk emanating from the US session last night, it’s been a bit of a mixed follow up in Asia this morning. With the Yen a bit weaker, the Nikkei is leading the way with a +1.09% gain, while the ASX is currently +0.26%. However as we head into the midday break it’s a big selloff in China which has rippled through other markets (despite there being a lack of newsflow) with the Shanghai Comp (-3.61%) and Shenzhen (-4.76%) both a steep leg lower. That’s taken the Hang Seng (-1.21%) and Kospi (-0.08%) with them, while Oil markets have retraced a touch.

Meanwhile the CNY fix was set little changed this morning. With the G20 Finance Ministers Meeting kicking off tomorrow in Shanghai expect a lot of focus not just on global growth and negative rate concerns, but also on the transparency of the PBoC’s FX policy. It’s far too early for coordinated fiscal policy to gain much traction but it’ll be interesting if there’s any chatter on this.

A lot of the volatility yesterday was centered on oil. It had initially continued the downward trajectory it had been on from Tuesday afternoon in what’s been a fairly wild week so far, touching a low yesterday of $30.56/bbl on the new contract which was nearing a 4% drop on the day (and nearly 9% off Tuesday’s high) before a sharp reversal sparked by the latest inventory data saw it bounce off the lows to close up +0.88% on the day and back above $32/bbl. Despite the latest EIA data showing crude stockpiles building on their 86-year high, much of the commentary was focusing on the larger than expected decline in Gasoline stockpiles last week which fell 2.2m barrels while demand for Gasoline and other refined products were up. That helped Gasoline futures climb over +4.5% yesterday. Credit markets were subject to similar swings in sentiment. In Europe we saw Main and Crossover finish 3bps and 13bps wider respectively with financials also under pressure. CDX IG initially opened up a sharp 4bps wider before paring all of that move to finish 1bp tighter on the day.
Moving on. We’d previously highlighted last week that the various US economic surprise indices that we monitor had been trending up in the last couple of weeks. Well over the last two days we’ve seen them hit of a bit of a wall as after Tuesday’s much softer than expected consumer confidence print, yesterday’s flash February services PMI dipped unexpectedly into contractionary territory (49.8 vs. 53.5 expected, -3.5pts from January) for the first time since October 2013 and just the second time since 2009. The reaction to this was fairly mixed. Some pointed towards this as being evidence of the much talked about weakness in the manufacturing sector now leaking into the larger services component, while others pointed towards the poor winter weather in January being a major factor as well as highlighting the still supportive employment sub-component in the data (-0.1pts to 54.2). In any case it’s another reason to keep a close eye on the ISM services data this time next week. It could be a pivotal release.

Away from this, US new home sales for January also disappointed yesterday, declining 9.2% mom last month (vs. -4.4% expected) although the trend in sales has continued to remain fairly positive of late. Treasury yields were once again subject to another big high to low range (11bps) before they eventually settled up a couple of basis points on the day at 1.749%.

Closer to home, in the UK we saw CBI reported sales fall 6pts to 10, while French consumer confidence was a little softer than expected at 95 (vs. 97 expected), falling a couple of points from January. Moves in core European rates markets reflected the largely risk off tone with 10y Bunds finishing 3bps lower at 0.152% and extending the recent lows to levels only lower in the mad frenzy around April last year. Remember yields closed as low as 7.5bps then, so we’re getting close. Speaking of levels, Sterling continues to get hit hard with the $1.40 level showing little resistance as the Pound smashed through it during the Asia session yesterday and edged lower as the day went on, eventually closing -0.68% at $1.393 (and -0.63% vs. the Euro) which is where its hovering this morning.

Over at the Fed, yesterday we heard from Dallas Fed President Kaplan who again reiterated his need to remain patient while leaving all options on the table in saying that he has no predetermined timetable in mind for the policy rate path. Kaplan also made special mention of the possibility of Brexit, noting that it is another potential tail risk that the Fed needs to keep a close eye on.

Meanwhile, Richmond Fed President Lacker was a bit more upbeat, saying that much of the recent decrease in market measures of inflation expectations ‘could represent a decline’ in risk premium, while his 10y expected inflation estimate forecast is ‘consistent with a belief that inflation will move back to the Fed’s target’. Finally, overnight the St Louis Fed President, Bullard, has become the latest Fed official to voice his opposition against negative rates in the US.

Looking at today’s calendar, the early data out of Europe this morning will be the preliminary reading on UK Q4 GDP along with the associated trade components. Shortly following this we’ll get the final revision to the July CPI data for the Euro area and Germany. It’ll also be worth keeping an eye on the Euro area money and credit aggregates data ahead of the ECB meeting next month. The highlight this afternoon in the US will be the preliminary readings for durable and capital goods orders (headlines for both expected to be +2.9% mom and +1.0% mom respectively). Away from this we’ll see the latest initial jobless claims reading, the FHFA house price index for December and finally the Kansas City Fed manufacturing activity print. Fedspeak wise we’ll hear from Lockhart (at 1.15pm GMT) who is due to give opening remarks at a banking conference, while this evening Williams (at 5.00pm GMT) is due to speak.

via Zero Hedge http://ift.tt/1Lf1q4r Tyler Durden