Another Morning Futures Pump – Will There Be A Fifth Consecutive Dump?

After tumbling overnight to just around 101.80, the USDJPY managed to stage a remarkable levitating comeback, rising all the way to 102.3, which in turn succeeded in closing the Nikkei 225 at the highs, up 1% after tumbling in early trade. The Shanghai Composite was not quite as lucky and as fear continue to weigh about a collapse in China’s credit pipeline, the SHCOMP was down more than 0.8% while the PBOC withdreww even more net liquidity via repos than it did last week, at CNY 98 billion vs CNY 48 billion. That said, this morning will be the fifth consecutive overnight levitation in futures, which likely will once more surge right into the US market open to intraday highs, at which point slowy at first, then rapidly, fade again as the pattern has seemingly been set into algo random access memory. Which in a market devoid of human traders is all that matters.

Turning to the overnight markets, Asian equities started the day on the back foot but the Nikkei (+0.7%) has managed to recover from the lows thanks to a bounce in USDJPY (+0.15%). There have been a number of BoJ-related headlines suggesting that further stimulus is on the cards in May to help cushion the blow from next month’s sales tax hike. The Hang Seng (-0.4%) and HSCEI (-0.2%) are both a touch weaker. With the strong performance in EM yesterday (more below) and lower US yields, the demand for Asian credit has been strong and Asian IG bonds are trading around 5-10bp tighter. Chinese macro headlines have been rather thin in the last 24 hours but there is further talk from the State Council of mini-stimulus – this time reports suggest the Council could accelerate development of the environmental protection industry (Securities Journal).

Coming back to the Fed who made headlines with the release of its “Comprehensive Capital Analysis and Review” after the US market close. The Review was essentially part two of the Fed’s annual bank stress tests. Of the 30 banks tested, the capital plans of five banks were rejected by the Fed. The largest of these five banks was Citigroup, followed by the US units of three foreign banks (HSBC, RBS and Santander). Zions Bancorporation’s capital plan was also rejected by the Fed, but this was expected after they failed to meet minimum capital requirements in part 1 of the Fed’s test last week. The Fed said its reason for objecting to Citigroup’s 2014 capital plan was that there were “a number of deficiencies in its capital planning practices, including in some areas that had been previously identified by supervisors as requiring attention, but for which there not sufficient improvement”. The Fed said that the three US units of foreign banks were new to the Review and therefore “may face challenges in developing appropriate capital planning processes that meet the Federal Reserve’s high expectations”. The shares of Citi, Zions, HSBC (ADRs), RBS (ADRs) and Santander all sold off between 2-5% after the close.

Turning to the day ahead, the latest Euroarea money supply data is due for the month of February, coming one week ahead of the ECB’s April meeting. UK retail sales, French consumer confidence and Italian business confidence are the other data releases in Europe. The Bank of England publishes its Financial Policy Committee statement. Stateside, the third estimate of Q4 GDP is due together with jobless claims (consensus 323k) and pending home sales. Cleveland Fed President Pianalto (a FOMC voter) will be speaking today.

Headline

Growing expectations of the ECB carrying out QE to support credit markets in Eurozone, together with month-end related flow supporting Bunds, dominated the price action in Europe this morning.
EUR remained under pressure, with the release of better than expected UK retail sales data prompting further downside in EUR/GBP which also saw the cross move below the 100 and also the 50DMA lines.
5 of 30 lenders failed the Fed’s stress test; Citigroup (C), Zions Bancorp (ZION), Santander (SAN SM), RBS (RBS LN), and HSBC US (HSBA LN) all failed.
Treasuries steady, 10Y holding just below 2.692% 200-DMA; week’s auctions conclude today with $29b 7Y notes. Yield 2.27% in WI trading; stopout yield at that level would be highest since December.
Yesterday’s 5Y auction awarded at 1.715%, 1.5bps below WI yield at 1pm according to Stone & McCarthy, biggest stop through by a 5Y since Jan. 2012
Sale benefited from highest yield since May 2011 and post-Yellen press conference curve flattening that pushed 5/30 spread to tightest since Oct. 2009 on Monday
U.K. retail sales rose 1.7% in Feb., more than three times as much as economists forecast, as Internet sales and spending on food surged
Ukraine reached a preliminary deal with the IMF to unlock $27b of international support to avert default and limit economic damage from a four-month political crisis
The yuan fell for a third day as the central bank weakened the fixing amid signs China will struggle to meet it 7.5 percent growth target this year
Thai satellite images of more than 300 objects in the southern Indian Ocean produced another lead in the search for Malaysian Air Flight 370 as bad weather forced aircraft to suspend their operations today
Sovereign yields lower. Nikkei +1%, Shanghai -0.8%. European equity markets mostly higher, U.S. stock-index futures gain. WTI crude little changed, gold falls; copper +0.42%

US Event Calendar

8:30am: GDP q/q, 4Q final, est. 2.7% (prior 2.4%); Personal Consumption, 4Q, est. 2.7% (prior 2.6%); GDP Price Index, 4Q, est. 1.6% (prior 1.6%); Core PCE q/q, 4Q, est. 1.3% (prior 1.3%)
8:30am: Initial Jobless Claims, March 21, est. 324k (prior 320k); Continuing Claims, March 14, est. 2.882m (prior 2.889m)
9:45am: Bloomberg Consumer Comfort, March 23 (prior -29.0)
10:00am: Pending Home Sales m/m, Feb., est. 0.2% (prior 0.1%); Pending Home Sales y/y, Feb., est. -9% (prior -9.1%)
11:00am: Kansas City Fed Manufacturing, March, est. 5 (prior 4)
1:00pm: U.S. to sell $29b 7Y notes
11:00am POMO: Fed to purchase $3.75b-$4.5b in 2018-2019 sector

Asian Headlines

JGBs softened overnight, with swaps curve bull flattening amid yet another session of light volume ahead of the fiscal year-end. Recovery by USD/JPY, which also saw the Nikkei 225 (+1.0%) retrace early losses and climb above the 14600 level weighed on FI prices.

Over in China, a source close to China’s State Administration of Foreign Exchange said there is no need to worry about capital outflows, adding that the reserve requirement ratio in China can help. Nevertheless, 7-day repo rate rose to 4.83% from 3.88% after the PBoC drained CNY 20bln via 28 day repos and CNY 32bln via 14 day repos, its 11th consecutive drain.

EU & UK Headlines

While as evidenced in the latest ECB O/N liquidity ops that excess liquidity has increased to c. EUR 117bln vs. EUR 111bln, easing pressure on EONIA fixings as banks continue to repay 3y LTRO loans, Euribor curve underwent further bull flattening this morning. The release of the latest M3 data, which showed that loans to private sector are contracting at -2.2% Y/Y, which marked the 22nd monthly decline. This, together with reports that European regulators are preparing to ease rules on asset-backed securities (ABS) in a bid to revive the market and provide lending to credit-starved small businesses prompted further speculation of easing by the ECB.

Looking elsewhere, the release of better than expected UK retail sales report ensured that despite the monthend related demand, UK Gilts have underperformed its EU peers, with the Short-Sterling curve undergoing bear steepening following the release. According to the ONS, the growth in retail volumes was led by food stores which contributed more than a half of the growth in retail sales.

Barclays preliminary pan-Euro agg month-end extensions: (+0.07y) (12m avg. +0.08y) Barclays preliminary Sterling month-end extensions: (-0.02y) (12m avg. +0.06y)

US Headlines

Flattening of 2/10s US swaps spread in anticipation of good demand for today’s 7y note auction by the US Treasury failed to filter through into USTs which traded relatively steady this morning. 4-10y area of the swaps curve benefited the most today from a very strong 5y auction yesterday which stopped through the WI by 1.2bps (the largest since Jan 2012) and revealed that dealer take-down fell to 26%, the lowest on record. Barclays preliminary US Tsys month-end extensions: (+0.07y) (12m avg. +0.08y)

Equities

Although stocks in Europe recovered off the lowest levels of the session, with credit spreads tightening as speculation of QE supported sentiment, the FTSE-100 index remained in the green amid lower base and precious metal prices, which resulted in basic materials underperforming. Firmer USD (+0.18%) weighed on both spot gold and silver prices this morning, with spot gold falling below the 200DMA line in the process.

At the same time, EU banking names came under pressure after yesterday’s release of the Fed stress tests showed that 5 of 30 lenders failed the Fed’s stress test.

– Following this announcement after-market yesterday, US stock futures hit a fresh low, with Citigroup shares down as much as 6%, RBS’s ADR down 2.7%, HSBC’s ADR down 2% and Santander’s ADR down 1%. The failure of the stress tests means Citigroup’s 2014 dividend and stock buyback plans have been rejected

Expectations of more policy easing by the ECB ensured that EUR remained under pressure, with the release of better than expected UK retail sales prompting further downside in EUR/GBP which saw the cross move below the 100 and also the 50DMA lines to touch on lowest level since early March. Looking elsewhere, NZD was the notable outperformer overnight in Asia, topping April highs in the process, after New Zealand reported a larger than expected trade surplus of NZD 818mln vs. Exp. NZD 600mln which was the highest ever surplus for the month of February.

Commodities

Precious metals traded lower this morning, with spot gold falling below USD 1,300 and also the 200DMA line, with palladium also under pressure on the back of a firmer USD and touted profit taking flow. Of note, analysts at ABN AMRO forecasts gold at USD 1250/oz end-June, revised from USD 1,100 and sees prices at USD 1,200 end-Sep, revised from USD 1,050. Analysts cited weaker USD and economic data, lower Treasury yields and tensions between Ukraine/Russia. At the same time, analysts at Goldman Sachs see 2014 as last year of global aluminium surplus on China and said that some aluminium smelters in China may shut this year.

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In conclusion, here is Jim Reid’s overnight recap

A 0.85% slide in the S&P500 (-0.7% on the day) during the final hours of US trading yesterday has set the tone for a mixed start to Thursday. A number of theories for the dip in risk were put forward, including President Obama’s warning of further sanctions “unless Russia alters its course”. However this was offset to a large extent by comments by Chancellor Merkel who said she was “not interested in escalation” of tension with Russia and that the West “has not reached a stage that implies the imposition of economic sanctions”. In reality, the market was also being dragged lower by US bank shares which had already begun selling off earlier in the day, and well in advance of the release of part two of the Fed’s stress tests which we discuss in more detail below. US tech stocks also led the broader declines after the -16% first day post-IPO performance of mobile gamemaker King Digital.

The retreat in equities saw USTs retrace most of their post-FOMC losses, led by the longer end as the UST curve continued to flatten and the front-end underperformed. Helping the bid for treasuries was a well received 5yr treasury auction which recorded a bid-to-cover ratio of 2.99x, the highest since September 2012 and higher than the average of prior ten 5-year auctions which had a bid-to-cover ratio of 2.60x. With yesterday’s move 10yr UST yields (-5.6bp) are now back at their pre-FOMC levels, joining 30yr treasury yields which dipped below FOMC levels a few days ago, while Eurodollar futures are only a few bp away from doing the same. Comments from a couple of Fed officials including Bullard and Plosser were also supportive of US yields. Bullard reiterated a number of times that Fed policy is data dependent. In a television interview, the usually-hawkish Plosser appeared to soften his recent stance somewhat. Plosser said although he saw QE ending in the fall, he wanted to see inflation creep higher and commented that policymakers must defend their 2% inflation objective both to the upside and downside. Plosser also said that that Yellen’s six month estimate between QE ending and the start of rate hikes is dependent on data and economic conditions at the time.

This was partly countered by other banks such as Morgan Stanley and Wells Fargo who announced upsized dividend and share buyback programs after the Fed’s stress tests were released. S&P 500 futures and USDJPY dipped slightly following the announcement, but the dip was relatively small and short lived. The dataflow on both sides of the Atlantic was largely ignored though we noted a fairly disappointing February US durable goods report. Orders were strong in the headline (2.2% vs 0.8% expected) but the ex-transportation (0.2% vs 0.3% expected) and non-defense, ex air orders (-1.3% vs 0.5%) disappointed relative to expectations. According to Reuters, the headline number was boosted by a large order from Boeing, reversing a slump in orders reported by the aircraft maker in the previous month. Equities dipped slightly following the data but losses were pretty minimal.

With US treasury yields back at one-week lows, EM extended its positive run yesterday with LATAM rates tracking about 5-10bp lower on the day. BRL recorded its fifth straight day of gains against the USD, which comes after Brazil’s Ibovespa notched up a seven day winning streak. The CDX EM credit index tightened (-7bp) for the fifth consecutive day and the search for yield extended to European periphery rates markets where Spanish and Italian bond yields were 5bp firmer. EURUSD continued to lose ground after Tuesday’s round of dovish ECB-speeches. Comments from the ECB’s Linde emphasising the non-zero risk of deflation seemed to add to the Euro bearishness.

Apart from the comments from Obama and Merkel, the other headlines from Ukraine related to a potential funding package being put together by the IMF. The FT is reporting that an IMF funding package will be announced as early as today which will provide US$15bn in emergency funding by the end of April. This is at the lower end of the $15bn-$20bn that Ukraine’s finance minister Shlapak said the country was seeking, although other nations are expected to contribute. Japanese PM Shinzo Abe this week announced his government would contribute about $1.5bn, and the EU is attempting to get final agreement for another EUR1.6bn. US assistance, in the form of $1bn in loan guarantees, is still being debated by Democrats and Republicans in Congress. The news of an IMF package will be welcome news for the Ukrainian hryvnia which has lost 20% against the USD in the last two weeks as reports suggest that the country’s FX reserves continue to deplete (Reuters).

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

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