In fitting with the pre-holiday theme, and the moribund liquidity theme of the past few months and years, there was little of note in the overnight session with few event catalysts to guide futures beside the topping out EURJPY. Chinese stocks closed a shade of red following news local banks might be coming under further scrutiny on their lending/accounting practices – the Chinese banking regulator has drafted rules restricting banks from using resale or repurchase agreements to move assets off their balance sheets as a way to sidestep loan-to-deposit ratios that constrain loan growth. The return of the nightly Japanese jawboning of the Yen did little to boost sentiment, as the Nikkei closed down 104 points to 15515. Japan has gotten to the point where merely talking a weaker Yen will no longer work, and the BOJ will actually have to do something – something which the ECB, whose currency is at a 4 year high against Japan, may not like.
In Europe the main highlight with the outperforming Spanish IBEX index, where Repsol gained around 4% following reports that Argentina has reached an agreement to compensate Spain’s Repsol for the nationalisation of energy firm YPF. We wouldn’t get any hopes up until CFK actually wires the money and receipt is confirmed. The Italian FTSE-MIB was the underperformer with Monte Paschi under pressure amid reports that the bank is to consider a capital increase of EUR 3bln, which is bigger than previously planned. This, together with another uptick in EONIA fix, driven by month-end and touted liquidity squeeze linked to ECB’s suspension of LTRO repayments after December 23rd until mid-Jan supported Bunds, which as a result outperformed USTs.
In the US, building permits, Case-Shiller home prices, the Conference
Board Consumer Confidence and the Richmond Fed Manufacturing index
(Nov) are the highlights.
US event calendar:
US: Building permits, cons 930k (8:30)
US: S&P /CS comp-20 y/y, cons 13.0% (9:00)
US: Consumer confidence index, cons 72.4 (10:00)
US: POMO for bonds maturiting 02/15/2036 – 11/15/2043: $1.25 – $1.75 billion
US: sells $35bn 5y notes (13:00)
Overnight news bulletin:
Bunds continue to remain bid, supported by month-end related flow and also uncertainty over the stability of the Italian banking system, where Monte Paschi shares are down over 6% amid reports that the bank is to consider a capital increase of EUR 3bln.
Argentina has reached an agreement in principle to compensate Spain’s Repsol for the nationalisation of energy firm YPF.
Looking ahead for the session there is the release of US Building Permits, S&P CS 20 City, Consumer Confidence Index, API US Crude Oil Inventories, USD 35bln 5y Note Auction by the US Treasury.
Market Re-Cap
Stocks traded mixed in Europe, with the IBEX index in Spain outperforming throughout the session where Repsol gained around 4% following reports that Argentina has reached an agreement in principle to compensate Spain’s Repsol for the nationalisation of energy firm YPF. At the same time, Italian FTSE-MIB lagged its peers, with Monte Paschi under pressure amid reports that the bank is to consider a capital increase of EUR 3bln, which is bigger than previously planned. This, together with another uptick in EONIA fix, driven by month-end and touted liquidity squeeze linked to ECB’s suspension of LTRO repayments after December 23rd until mid-Jan supported Bunds, which as a result outperformed USTs. Looking elsewhere, the recent removal of USD/JPY RKO barriers which left market short JPY calls saw R/R lose topside bias and left the spot rate vulnerable to downside. Going forward, market participants will get to digest the release of the latest CaseShiller housing data, as well as the Consumer Confidence report for the month of November.
Asian Headlines
PBOC’s governor Zhou said that domestic inflation is stable and key China indicators are in reasonable range. Zhou added that they must continue prudent monetary policy and must continue proactive fiscal policy. In Japan specific news flow, BoJ minutes from October 31st Meeting stated that most members said 2% inflation is likely in the second half of the projection period. The JPY swap curve bull-flattened on the back of receiving in 10s and receiving ultra-long end following the strong 40y auction.
EU & UK Headlines
ECB’s Weidmann said government bonds should be risk weighted and banks’ exposure to sovereign debt should be capped. Weidmann also commented the ECB’s bank supervisor role should not be permanent, that he sees a gradual economic recovery in Europe and that data shows no need to revise forecast.
ECB’s Noyer said the Euro area recovery is weak and fragile and fragmentation in the Euro Areas is decreasing.
BoE’s Carney says timing of 7% threshold is subject to uncertainty.
BoE’s Dale says if we start to see inflation expectations pick up, we will react.
Barclays month-end extensions: Euro Aggr (+0.04y)
Barclays month-end extensions: Sterling Aggr (+0.06y)
US Headlines
The US wont change its flight operations to comply with China’s newly claimed air defence zone in the East China Sea, according to a Pentagon spokesman. There were also reports that Japan and US may deploy an unmanned plane to East China Sea.
Barclays month-end extensions: Treasuries (+0.10y) – Of note, although the avg. is around 0.06y, larger than avg. increase had been expected given the 3y, 10y and 30y refunding auctions last week.
Equities
As mentioned, the Spanish IBEX is very much leading the way for European equities after Repsol shares were seen up around 4% following reports that Argentina has reached an agreement in principle to compensate Spain’s Repsol for the nationalisation of energy firm YP. In comparison it is the FTSE-MIB is leading the way downwards after it was reported that Monte Paschi are to consider a capital increase of EUR 3bln. Therefore, marking a divergence in the performance of the periphery.
FX
From an FX perspective, EUR strength was being observed across the board following stops being tripped on the break of 1.3550 amid USD weakness which resulted from USD/JPY trading in negative territory following recent topside RKO barrier removal leaving market short JPY calls with risk reversals highlighting positioning as flows favour downside.
Commodities
Heading into the North American open WTI and Brent crude futures trade in positive territory in a continuation of the paring of yesterday’s declines, with the WTI-Brent spread narrowing amid increased doubts of how quickly the P5+1 and Iran deal could translate to increased supplies.
The Russian government mulls helping refinance debts of metals and mining giants. According to reports, the Russian government may guarantee loans and subsidize interest rates as well as urging sales of loss-making assets and allow layoffs.
Akbar Hashemi Rafasnjani, one of Iran’s most influential political leaders, has raised hopes of a comprehensive nuclear deal with world powers within a year, saying that Sunday’s interim deal has been the hardest step because it meant overcoming decades of diplomatic estrangement with the US.
SocGen recaps today’s macro events, or rather lack thereof:
A fifth straight monthly decline in US pending home sales in October (-2.2% yoy) does not send the message of a strong recovery in housing market demand but fortunately there are other indicators that do. As this is Thanksgiving week, the decline does not warrant a significant market response either. Part of the drop was blamed on
the government shutdown that helped to deflate UST yields for a third session on the trot which will help to set up for demand for this week’s 5y and 7y supply. Elsewhere, the fall in commodity prices has spilled over into a fifth successive week and is causing trouble for currencies like the AUD, NOK, RUB and BRL which staged the biggest losses yesterday vs the EUR and USD.
The release of US consumer confidence data and its employment sub-component will garner close attention today. A collapse of 9pts pulled confidence down to 71.2 in October but if we assume that this was related in part or in its entirety to the federal shutdown, then a bounce back should be on the cards for November. The labour differential deteriorated last month as well but given the statistical irrelevance for hiring trends last month, the data may not carry much significance as we start collecting anecdotal evidence ahead of next week’s US employment report.
It is set to be a quiet day for eurozone data, as it only features second tier Italian confidence data. We also look for decent demand for the EUR3bn DSL bonds up for sale from the Netherlands. Statistics from our FI colleagues show that the sovereign has completed 93% or EUR46bn of its EUR50bn annual issuance programme compared to this time last year. A turn for the better in the economic data has been observed in the Netherlands in recent weeks with industrial output rising at an annual rate of 0.4% and consumer confidence rising to levels last seen in July 2011. The Dutch central bank yesterday started a review of Dutch commercial banks’ commercial real estate loans which it hopes to conclude before the ECB inquiry.
DB’s Jim Reid concludes the overnight even recap:
It was by no means the most fascinating day for markets yesterday with the early boost from the Iran news failing to gather much momentum through the US session. Even Brent retraced most of its Asian session losses to finish the day broadly unchanged at around US$111/bbl. Some late selling in US equities saw the S&P 500 (-0.13%) finish the day on a softer tone. The US data flow was generally disappointing yesterday which may have impacted markets a touch. Although we can’t help thinking that slightly disappointing data is the ideal scenario for these liquidity hungry markets.
The earlier stronger European risk tone after the Iran story was perhaps cemented by dovish notes from ECB’s Hansson who suggested that a further ECB rate cut could be ruled out. Indeed the day saw major equity benchmarks in Germany, France, and UK close +0.88%, +0.55% and +0.30% higher respectively. Credit continued to steadily grind tighter and barring any major macro events the appetite for spread products seems firm into year-end as the search for additional carry continues. Indeed the tightening in credit spreads has been fairly notable of late with Crossover and Main indices about 20bp and 5bp tighter since the end of October and 85bp and 26bp off their recent late September wides. On the other side of the pond, the CDX IG index is 5bp tighter this month and 17bps away from its early October wides.
Recapping yesterday’s data weakness, pending home sales fell -0.6% mom/-2.2% yoy in October. This was partly due to the government shutdown but higher mortgage rates and higher house prices may have also been a contributing factor so it will be interesting to see if we’ll get a rebound in the series next month. Away from housing the Dallas Fed survey (1.9 v 5.0 expected) was also disappointing which extends the weakness that we saw in earlier surveys from the New York and the Philly Fed. With this weakness the Chicago PMI tomorrow will be an interesting leading indicator for next week’s ISM manufacturing report.
Turning to the overnight session, North Asian equities are trading on a slightly stronger tone than those further south with bourses in China (+0.2%), Hong Kong (+0.2%), Taiwan (+0.7%), and Korea (+0.1%) faring better than markets in India (-0.3%) and Indonesia (-1.0%). Chinese banks might be coming under further scrutiny on their lending/accounting practices according to Bloomberg. They are suggesting that the Chinese banking regulator has drafted rules restricting banks from using resale or repurchase agreements to move assets off their balance sheets as a way to sidestep loan-to-deposit ratios that constrain loan growth. Chinese banks shares are seemingly unaffected with ICBC and Bank of China up +0.2% and +0.5%, respectively as we type.
Staying on China, there seems to be increased focused on the rising sovereign and corporate bond yields domestically. Indeed China’s 10yr government bond yields have risen to around 4.6% from the lows of 3.4% in May this year. Using Bloomberg’s database the yield has never been this high since data started in June 2005. Issuance volumes have also declined steadily over the last few months and in recent weeks we have seen regular Chinese issuers either scale back or postpone bond deals as the appetite for onshore fixed income assets seemingly weakens. Some statistics reported by the WSJ showed that bond issuance in China fell to RMB687bn in October from RMB786bn in September and RMB822bn in August. Our CNY rates strategist, Linan Liu, noted that the recent sharp rise in CGB yields is a reflection of the tightening liquidity conditions onshore, supply pressure and the crowding out effect on the cash government bond market by commercial banks’ allocation to NSAs. She sees the 10yr yield capped at 4.8% in the near term as supply pressure will fade in December but a further squeeze in money market rates may drive 10Y CGB yield towards 5%.
Looking at the day ahead, Italian consumer confidence, and Spanish budget updates are the main releases from Europe. In the US, building permits, Case-Shiller home prices, the Conference Board Consumer Confidence and the Richmond Fed Manufacturing index (Nov) are the highlights.
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