Futures Soar 40 Points In Hours On Hopes Of Futher Economic Weakness

We summarized yesterday’s both better and worse than expected Chinese GDP data as follows: “a substantial deterioration of the economy, one which was to be expected yet one which can be spun as either bullish thanks to the GDP “beat”, and negatively if the purpose is to make a case for more PBOC stimulus.” Sure enough here are the headlines that “explain” the latest overnight futures surge which has once again brought the S&P into the green on the year – a 40 point Spoo move in hours since yesterday’s bottom when the Nikkei “leaked” Japan’s economy is on the ropes :

Stocks Rise on China Stimulus Speculation

Here one should of course add the comment that launched yesterday’s rebound, namely the Japanese warning that its economy is about to contract, adding to calls for more BOJ stimulus, and finally this other Bloomberg headline:

The Strengthening Case for ECB Easing

And there you have it – goodbye “fundamental” case; welcome back “central banks will once again bail everyone out” case. Hopefully today’s news are absolutely abysmal to add “US economic contraction fear renew calls for untapering” to the list of headlines that should send the S&P to all time highs by the end of today.

What else is going on: stocks in Europe partially shrugged off mounting concerns over Ukraine and remained in the green, benefiting from a positive close over on Wall Street which consequently filtered over into the Asian session (Nikkei 225 +3.0%).

GBP rallied across the board and Short-Sterling curve bear-steepened after UK unemployment rate fell to 6.9%, below the 7% threshold as advocated by the BoE. Britain’s unemployment rate dropped to a five-year low in February, underscoring the strength of the economic recovery and raising the prospect of a debate among Bank of England officials about whether to raise interest rates

Looking at the day ahead, though we may run into some pre-Easter pockets of illiquidity, there’s still plenty of data and Fed speak ahead today for the markets to mull. Ahead of the four-party EU/US/Russia/Ukraine summit in Geneva on Thursday, it will be worth watching what political leaders have to say today on the prospect of sanctions. European data will be centred on the final Euroarea CPI for March, UK unemployment and Spanish trade. Across the Atlantic, Yellen’s speech to the Economic Club of NY is scheduled for around 5:25pm London time, but the text of her speech may be made available shortly before that. The Fed’s Stein and Lockhart will be speaking at the Atlanta Fed’s financial market conference while the Dallas Fed’s Fisher speaks in Texas shortly after Yellen. In terms of US data, housing starts, building permits and industrial production are the key releases. The Fed Beige Book may provide more anecdotal commentary on how activity is recovering post-winter. BofA and Google report earnings today.

Bulletin headline summary from Bloomberg and RanSquawk

Treasuries decline within ranges seen since Friday as stocks in Asia and Europe and commodities rebound from recent losses; trading may slow before Yellen’s speech in New York, long holiday weekend.
China’s GDP rose 7.4% in 1Q, weakest pace in six quarters; industrial production and fixed-asset investment trailed projections while property construction plunged
Offshore yuan traded near a 14-month low after the PBOC weakened the currency’s reference rate for a third day
The euro area’s core inflation rate fell more than initially estimated in March, keeping pressure on the ECB to take action to boost prices
Ukraine accused Russia of fueling “terrorism” in its eastern provinces as government troops pressed on with an offensive to rein in separatist unrest
Japan’s government may downgrade its economic assessment for the first time since November 2012 amid a drop in consumption after this month’s sales-tax increase, the Nikkei newspaper reported, without citing anyone
Chinese investors demanding their money back from a troubled 973 million-yuan ($156 million) high-yield product in Shanxi province were confronted by police in front of a China Construction Bank Corp. branch
Sovereign yields mostly higher. Asian stocks gain, Nikkei +3%, Shanghai +0.2%. European equity markets, U.S. stock futures gain. WTI crude and copper higher, gold lower

US Event Calendar

7:00am: MBA Mortgage Applications, April 11 (prior -1.6%)
8:30am: Housing Starts, March, est. 970k (prior 907k)
Housing Starts m/m, March, est. 7% (prior -0.2%)
Building Permits, March., est. 1.010m (prior 1.018m, revised 1.014m)
Building Permits m/m, March, est. -0.4% (prior 7.7%, revised 7.3%)
9:15pm: Industrial Production m/m, March, est. 0.5% (prior 0.6%)
Capacity Utilization, March, 78.7% (prior 78.8%, revised 78.4%)

Fed action

8:30am: Fed’s Stein speaks on QE at Atlanta Fed conference at Stone Mountain, Ga.
12:00pm: Fed’s Lockhart speaks at Stone Mountain
12:25pm: Fed’s Yellen speaks to Economic Club of New York
1:25pm: Fed’s Fisher speaks in Austin, Texas
2:00pm: Federal Reserve releases Beige Book
8:30pm: Bank of Japan’s Kuroda speaks at branch managers meeting
11:00am POMO: Fed to purchase $900m-$1.15b in 2036-2044 sector

Asian Headlines

Asia-Pacific focus was on the Chinese GDP: (Q1) Y/Y 7.4% vs. Exp. 7.3% (Prev. 7.7%), which supported gains in equity markets overnight. However, Chinese equities slightly underperformed as quarterly figures showed the slowest growth since late 2012. Other data releases included softer industrial production (8.8% vs. Exp. 9.0%) and weaker quarterly growth (1.4% vs. Exp. 1.5%).

EU & UK Headlines

Concerns over the instability in Ukraine failed to support safe-have assets, with both Gilts and Bunds trading sharply lower after the release of the latest UK jobs report, which revealed that the unemployment rate is now below the BoE’s 7% threshold and stands at its lowest since 3 months to February 2009. This in turn prompted aggressive bear-steepening of the Short-Sterling curve as market participants contemplated of an earlier tightening move by the BoE.

However analysts at UBS suggested that inflation matters more than UK jobs and believe that GBP is stretched, adding that the BoE will try to emphasize soft inflation in context of policy and spare capacity, and may disappoint those looking for early tightening.

The release of the latest EU CPI data which Y/Y core at 0.7% vs. Exp. 0.8% and Y/Y at 0.5% vs. Exp. 0.5% acted as a reminder of potential emergence of deflation in the joint-currency bloc. On that note, analysts at Bank of America believe that the ECB needs EUR 1trl in QE for measures to be effective, adding that the ECB will have to purchase government bonds as well as private sector assets in event of QE and that at least EUR 75bln (EUR 40bln in govt bonds) per month would be necessary.

US Headlines

Intel Corp and Yahoo! shares traded sharply higher after the closing bell on Wall Street yesterday after reporting consensus beating earnings. In terms of earnings, focus will be on Google, IBM, Bank of America and also American Express.

Equities

Equities in Europe, initially buoyed by a positive close over on Wall Street and the consequent risk on sentiment over in Asia, failed to hold onto the best levels of the session as concerns over the growing instability in Ukraine weighed on sentiment. Nevertheless, heading into the North American open, stocks are seen higher across the board, with consumer services as the outperforming sector as Tesco shares surged over 5% following earnings pre-market.

The release of better than expected UK jobs report saw GBP rally across the board, with GBP/USD advancing to its highest level since Feb, while EUR/GBP tested April lows. At the same time, the USD failed to benefit from the risk averse sentiment amid the uncertainty surrounding direct implications of further sanctions on Russia and its appetite for the global reserve currency. As a result, in spite of lower EUR/GBP, EUR/USD remained better bid.

Commodities

WTI and Brent crude futures remain higher, with Brent at early March highs and above USD 110/bbl as markets remain nervy over Ukrainian tensions. The energy complex has been on the front foot following the original headlines of APCs defecting from the Ukrainian army to fly the Russian flag and move into Slavyansk ahead of potential anti-terror operations directed by President Turchynov. The continued mobilisation of military units has heightened market expectations of further conflict in the area after fatalities were reported yesterday.

Yesterday’s API inventory data is as follows:
– US API Crude Oil Inventories (Apr 12) W/W 7640k vs. Prev. 7080k
– Cushing Crude Inventories (Apr 12) W/W -640k vs. Prev. 204k
– Gasoline Inventories (Apr 12) W/W -499k vs. Prev. -3650k
– Distillate Inventories (Apr 12) W/W -1110k vs. Prev. 293k

* * *

Jim Reid’s overnight recap concludes this summary

China’s Q1 statistical update was released earlier this morning and it was met with a mixture of relief and pessimism which will only heighten the market’s confusion as to the state of the domestic economy. Starting with GDP, growth in Q1 was measured at 7.4% y/y which marginally beat median market expectations of 7.3% but was consistent with DB’s estimates. There is some relief that growth beat consensus but Q1’s growth rate was still below 4Q13’s growth of 7.7%. The other negatives are that Q1’s y/y growth is a cyclical low and the annualised Q/Q GDP number works out to be just 5.7%. Retail sales grew 12.2% YoY in Q1 which again was just ahead of estimates of 12.1% but substantially below 4Q13’s 13.6%. Industrial production missed estimates at 8.8% (vs 9.0% consensus and 9.7% recorded in Q4). Finally, fixed asset investment grew 17.6% YTD YoY which was below expectations of 18.0%. So all in all, evidence of slowing growth and activity which is consistent with recent PMIs, but perhaps not as bad as the market had feared from an overall GDP growth point of view. To add to the confusion there’s also a sense that the numbers were not bad enough to prompt a sudden easing of policy from the Chinese authorities. Something for both the bears and the bulls here this morning.

Unsurprisingly the reaction to the data has been mixed. The Nikkei and S&P 500 futures rallied into the data releases, and though some of the gains have been pared since, both are still sitting on healthy gains this morning. There are some heightened expectations that the BoJ will ease further in the coming months as the Nikkei reported that the Japanese cabinet may downgrade its economic outlook when it issues its monthly assessment tomorrow. This would be the first downgrade since late 2012. The reaction to the data from Chinese equities was more negative and we saw the Shanghai Composite shed 0.9% in the minutes after – however it too is now trading in positive territory. Shanghai copper is up 0.2% and the AUDUSD is steady at 0.935. Despite the negative headlines emanating from Ukraine yesterday, Asian EM is having a decent run today helped by firmer US treasuries. Asian EM equity bourses are generally firmer today and Asian credit is flat to a couple of basis points tighter on the day.

The story of yesterday was the large intra-day swings in markets with the S&P 500 (+0.68%) covering more than 27 points from it’s early peak, down to its
the intraday low and retracement up to the closing highs. All day it appeared that markets were playing out a tug of war between the headwinds of geopolitical headlines versus the tailwinds of strong US corporate results. On the geopolitical side, events in the Ukraine took a turn for the worse as Putin described Ukraine as being on the brink of a civil war as clashes were recorded in a number of eastern Ukraine flashpoint cities. The Ukrainian government claimed that Russia’s 45th airborne division had crossed the border into its territory. It seems that Thursday’s four-party EU/Russia/US/Ukraine summit in Geneva will be a pivotal event heading into the long weekend. The probability of further sanctions against Russia appears to be growing and the yield on Russian government bonds gapped out by 16bp, slightly less than spreads on Russian banks which gapped out more than 20bp. Sberbank of Russia’s US ADR’s were down 3.6% in US trading.

Risk recovered as US participants started their day, spurred by some solid premarket results from Johnson & Johnson and Coca-cola. Coke’s management was relatively upbeat on its outlook and it said that Coke was enjoying revenue growth in EM including China (+12%), Brazil (+4%) and Russia (+6%). After the closing bell, Intel reported EPS above consensus on the back of better gross margins (Q1 59.7% vs 59.1% expected) and was also positive on the outlook of Q2 margins. Intel was relatively upbeat in its forecast for Q2 saying that business PC upgrades are set to pick up. However the broader macro implications of this might be limited given that upgrades are occurring based on Microsoft ceasing support for its Windows XP operating system. Intel’s stock was up 3.5% in aftermarket trading. Yahoo! Inc also reported strong results and the stock surged 9% in afterhours trading.

US treasuries started the overnight session firmer on Ukraine fears but gave up most of those gains after the release of a stronger than consensus US CPI report. 10yr yields closed 2bp firmer (2.63%) but the shorter end of the curve underperformed with 5yr yields up nearly 1bp. Both headline and core US CPI printed at +0.2% in March (vs expectations of +0.1% for both). This had the effect of lifting the YoY rate in the headline to +1.5% from +1.1% previously (1.4% exp); and the core moved up to +1.7% from +1.6% previously. In other data, the NY Empire state manufacturing index for April fell to +1.3 (vs. +5.6), the lowest level since November 2013 (+0.8). However the six month outlook on capital expenditures (+23.5 vs. +16.5) rose to one of its strongest levels in many months. DB’s economists have maintained their forecast for this Thursday’s Philly Fed survey (+10.0 forecast vs. +9.0 previously). Elsewhere the US Homebuilders’ sentiment index rose 1 point to 47 (vs 49 expected) due entirely to a 4 point increase in the six-month outlook (57 vs. 53).

Yellen’s brief remarks at the Atlanta Fed’s financial markets conference were mostly related to the issue of financial stability. In a short speech, Yellen urged further action to strengthen liquidity regulations for banks and she spoke in firm support of the Basel Committee’s Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) measures. In addition to that she said that the Fed is considering additional measures to strengthen liquidity requirements in the financial markets via minimum margin requirements for repos and other security financing transactions which could apply on a market-wide basis. Though she steered clear of talking about monetary policy, we’re likely going to hear more on this topic when the Fed Chair speaks at the Economic Club of NY today.

With many in the market talking about next steps for the Bank of Japan, there are a couple of interesting economic headlines this morning. The country’s finance minister made some vague comments in parliament that the Government Pension Investment Fund “will make a move” in the stock market in June, perhaps hinting at imminent asset allocation changes. In terms of the impact of the country’s recent 3% sales tax hike, the Nikkei says that anecdotal evidence suggests that the effect hasn’t been all bad, which were echoed by the Japanese PM earlier this morning. According to the Nikkei, supermarkets and electronics stores, which saw sales dip right after the tax increase, are now saying the slump is tapering off. Aeon Retail, which runs large general merchandise stores, reported that over the second weekend of April, same-store sales recovered to about the same level seen the previous year. Department stores, on the other hand, are having a lot of trouble moving luxury products with little recovery one the second weekend of April. The Nikkei says that two Isetan Mitsukoshi stores, sales of such products are down 50% on the year. The article suggests that perhaps the demand for larger ticket items was disproportionately pulled forward ahead of the tax hike.

via Zero Hedge http://ift.tt/1iZ8ijc Tyler Durden

Leave a Reply Cancel reply