It’s Another Non-Virtual Futures Ramp In A Virtual Reality World

Another morning melt up after a less than impressive session in China which saw the SHCOMP drop again reversing the furious gains in the past few days driven by hopes of more PBOC easing (despite China’s repeated warning not to expect much). A flurry of market topping activity overnight once again, with Candy Crush maker King Digital pricing at $22.50 or the projected midpoint of its price range, and with FaceBook using more of its epically overvalued stock as currency to purchase yet another company, this time virtual reality firm Occulus VR for $2 billion. Perhaps an appropriate purchase considering the entire economy is pushed higher on pro-forma, “virtual” output, and the Fed’s capital markets are something straight out of the matrix. Despite today’s pre-open ramp, which will be the 4th in a row, one wonders if biotechs will finally break the downward tractor beam they have been latched on to as the bubble has shown signs of cracking, or will the mad momo crowd come back with a vengeance – this too will be answered shortly.

In Europe, shares rose and also traded close to intraday highs, with the autos and insurance sectors outperforming and telcos, real estate underperforming. The German and Spanish markets are the best-performing larger bourses, Swedish the worst. The euro is weaker against the dollar. Japanese 10yr bond yields rise; Greek yields increase.

Taking a brief look at overnight markets, EURUSD is holding at around the 1.382 level, but the lower USD vs EMFX theme over the last day or so has moderated. The IDR (-0.1%), CNH (-0.15%) and CNY (-0.15%) are all trading a bit weaker against the USD overnight. Asian equities are in positive territory again following the lead of the S&P 500 which closed at +0.44% yesterday. Chinese banks (+2.2%) are leading the Hang Seng China Enterprises Index (+1.8%) higher after a fairly solid set of results from Agricultural Bank of China which are partly allaying fears of an impending banking crisis in China. ABC reported profit growth of 14.6% YoY and at the same time management provided some reassuring comments on net interest margins and asset quality. Against expectations, non-performing loans fell by 0.2% QoQ and the NPL ratio fell to 1.22% as at Dec 2013 (vs 1.24% previous quarter). Management indicated that it expects NPLs to remain stable in 2014. The rest of China’s big four banks will be reporting earnings this week. The positive commentary from ABC stood in contrast to reports from another Chinese bank, small rural lender Jiangsu Sheyang Rural Commercial Bank, which yesterday suffered a deposit run at one of its branches after talk that it was insolvent (South China Morning Post). The bank has denied those rumours. Outside of China, the Nikkei (+0.3%) is trading somewhat cautiously ahead of a planned sales tax hike which will be instituted from next week onwards. The AUD is trading a multimonth highs against the USD (0.919) after the RBA’s Stevens said that there are encouraging signs of a transition from mining-led growth to domestic consumption.

On today’s calendar, there are a few economic releases on the radar plus an EU-US Summit in Brussels which may result in more noise around the Ukraine-Russia situation. A press statement is due at 11:30am London time. The Fed releases part two of its annual bank capital stress tests in the form of its Comprehensive Capital Analysis and Review. The main data releases is US durable goods, but ahead of that there is consumer confidence in Germany and Italy and employment data in France.

Bulletin News Summary from RanSquawk and Bloomberg

Treasuries steady as week’s auctions continue with $13b 2Y FRN and $35b 5Ys. 5Y yields 1.755% in WI trading; stopout at that level would be highest since May 2011.
2Y auction yday was awarded at 0.469%, highest 2Y stop in almost three years; stop was 0.8bp lower than WI yield at 1pm according to Stone & McCarthy, biggest stop through by a 2Y since Feb. 2011
St Louis Fed’s James Bullard said policy makers haven’t committed to a specific month to end bond purchases even as it would take a significant shift in the outlook to alter the path of tapering
Reserve Bank of Australia Governor Glenn Stevens said there are encouraging early signs of a handover from mining-led demand growth to domestic consumption and the nation’s economy may strengthen later this year
Americans will get more time to enroll in Obamacare insurance plans if they started the process but were unable to complete it before the March 31 deadline
North Korea fired two ballistic missiles capable of reaching both Japan and South Korea as President Barack Obama hosted the first meeting between the leaders of the U.S.’s biggest Asian allies
Obama and Hillary Clinton’s vision for a globalized foreign policy and “reset” relations with Russia have been disrupted by Putin’s annexation of the Crimea and a Russian troop buildup along the Ukrainian border
Sovereign yields mostly lower. Nikkei +0.4%, Shanghai -0.2%. European equity markets, U.S. stock-index futures higher. WTI crude and gold higher; copper declines

US Economic Calendar

7:00am: MBA Mortgage Applications, March 21 (prior -1.2%)
8:30am: Durable Goods Orders, Feb., est. 0.8% (prior -1%); Durables Ex-Transportation, Feb., est. 0.3% (prior 1.1%); Capital Goods Orders Non-defense Ex-Air, Feb., est. 0.5% (prior 1.7%, revised 1.5%)
Capital Goods Shipments Non-defense Ex-Air, Feb., est. 0.8% (prior -0.8%, revised -1%)
9:45am: Markit U.S. Composite PMI (prior 54.1); Markit U.S. Services PMI, est. 54.0 (prior 53.3) Central Banks
4:00pm: Fed releases capital analysis and review results
8:20pm: Fed’s Bullard speaks in Hong Kong Supply
11:30am: U.S. to sell $13b 2Y FRN
1:00pm: U.S. to sell $35b 5Y notes
11:00am POMO: Fed to purchase $2.25b-$2.75b in 2021-2024 sector

Wrapping up, here is the overnight summary by DB’s Jim Reid

As we’ve been discussing over the last couple of days, we’ve become a bit more worried of late about what might happen to markets in the second half of the year due to a more hawkish Fed than we expected and an ECB that seemed stuck after what looked like a promising pre-emptive rate cut in November last year. However we only tweaked our still bullish spread forecasts slightly as we felt there was still time for central banks to become more dovish again. Well yesterday some members of the ECB broke their silence to perhaps signal a softening of their stance. Ironically of all the ECB speakers yesterday, it was Draghi (the last speaker) who appeared the least dovish. He argued that current monetary policy will start to become more effective as the economy recovers. He did say that the ECB stands “ready to take additional monetary policy measures” but only if any downside risks to this scenario appear” adding that “right now we think that the risks of having deflation are limited”.

This came after the Bundesbank’s Weidmann had indicated that he wouldn’t rule out QE in Europe. Specifically he said the ECB could consider QE, but that it has to be considered with respect to the costs and side-effects. He signalled that he sees no immediate need for fresh intervention but also kept the door open on negative interest rates in order to counter a strong Euro. In addition to Draghi and Weidmann, ECB governing council members Liikanen, Makuch and Visco all warned on the dangers of deflation and suggested that the ECB is prepared to act decisively through non-standard measures or further rate cuts.

Due to all the commentary yesterday, the Euro saw a wild ride as a result – trading down 0.64% to 1.3750 at the lows before bouncing back strongly to close at 1.382. So although the rhetoric did talk down the Euro for a while it will likely need actual action to make a difference. However at least yesterday saw ground for hope for those looking for a better deflation firebreaker from the ECB.

While we watch the policymakers at the ECB and Fed, we should also highlight the importance of policymakers in China and their potential reaction to recent disappointing economic data and leading indicators. Following the weaker than expected HSBC flash manufacturing PMI on Monday, a number of commentators have been calling for policymakers to loosen policy either through fiscal or monetary means. The prospect of stimulus has provided a bit of a boost to domestic equities since late last week (Shanghai Comp +3.7% since Friday). However from a fiscal standpoint, Finance Minister Lou Jiwei said last week that the government will not resort to fiscal policies to boost growth and will instead focus on the quality of growth. This has been partly countered by recent suggestions from the State Council that they could accelerate programs in a bid to shore up growth in the immediate term. On the monetary side, our Chinese rates strategist Linan Liu asks the question whether we could see a RRR cut in China in Q2. Linan concludes that the chances of an RRR cut in Q2 are rising given potential capital outflows from China in the coming months and a breakdown in the transmission between falling money market rates to lower financing costs for the real economy. For the time being, it appears that the balancing act between carrying out reforms and loosening policy is still being played out in China, with important consequences for near term growth.

Looking more broadly at EM in general, the stability of the EM complex over the last week or so has probably surprised many. With the more-hawkish-thanexpected March FOMC now almost a week behind us, a number of EM assets are in fact trading at stronger levels than they were going into last Wednesday’s meeting. Indeed if we compare Tuesday 18th to Tuesday 25th closes, EM credit (CDX EM index -15bp) and EM equities (MSCI EM +0.6%) have performed resiliently. The story is fairly consistent in individual assets across EMEA, Asia and LATAM with the Ibovespa (+4.4%), HSCEI (+3.7%), Turkish lira (+0.1%), Mexican peso (+0.3%) and Russia 5yr CDS (-10bp) all trading firmer during the past week. Even a rating downgrade from S&P failed to dampen the price action in Brazilian CDS and the BRL yesterday, with both closing tighter/firmer as investors unwound short positions throughout the day. The jury appears split here – some think we are seeing a delayed reaction to the Fed, while others believe that EM’s lower valuation or lighter positioning has made the asset class better able to withstand the commentary from the Fed.

Speaking of the Fed, the Philly Fed’s Charles Plosser (a FOMC voter and a hawk) was the latest Fed official to confirm Yellen’s heavily-debated “six months” statement. Plosser argued yesterday that Yellen did not make a mistake when she said that there may be around six months between the end of QE and first rate hikes. Plosser also said that the six months time frame was already expected in markets, but conceded that it was data dependent. Though he is a noted hawk, it was interesting to see that Plosser thinks the rates will rise to 4% in 2016. This was at odds with the Atlanta Fed’s Dennis Lockhart, who said yesterday that the Fed will likely begin raising rates in the second half of 2015, and that the six months timeframe was really a minimum.

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

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