After the G-20 ended in a wave of global disappointment, leading to the biggest Yuan devaluation in 8 weeks, and sending Chinese stocks into a tailspin on concerns the PBOC has forsaken its stock market as well as speculation the housing bubble is now sucking up excess liquidity which in turn pushed global market deep in the red to start the week, it was the PBOC’s turn to scramble in a panicked reaction to sliding risk exactly one month after Japan unveiled its own desperation NIRP, and as reported before unexpectedly cut its Reserve Requirement Ratio by 0.5% to 17.0%, the first such cut in 2016 and the 5th since the start of 2015.
Since this move is an implicit liquidity injection, it was immediate negative for the offshore Yuan which tumbled…
… forcing cynical observers to ask if the PBOC “told” the G-20 about this major intervention in its currency just hours after it “promised” it would refrain from precisely such an action.
And while desperate central banks are now the norm, what is more troubling is that just like in the case of Japan’s negative rates announcement, so far China’s latest RRR cut has failed to prompt a substantial bounce in either US equity futures or the all important USDJPY carry trade, which at last check was unchanged with the E-mini was barely up from overnight lows and still red.
And if the PBOC is indeed powerless to provoke a risk on move, as we said last night it will be all up to Draghi and the ECB on March 10.
One asset classes that did not ignore the latest risk disappointment was gold which has again rebounded from recent lows around $1,200 and is headed for the biggest monthly advance in four years as a darkening global outlook spurred demand for haven assets. Bullion for immediate delivery added 0.9 percent to $1,234.09 an ounce. It’s up more than 10 percent in February, set for the biggest gain since January 2012.
Bulletin Headline Summary from RanSquawk
- PBoC’s shock decision to lower the RRR sees European stocks pull off worst levels, while soft EU CPI figures increased speculation of more stimulus from the ECB.
- AUD has been the main beneficiary from the latest PBoC action, while USD/JPY trades lower after a failed break above 114.00
- Looking ahead, participants will be placing a keen eye on the latest US Chicago PMI data and Pending Home Sales.
Where we stand now:
- S&P 500 futures down 0.2% to 1939
- Stoxx 600 down 0.6% to 330
- MSCI Asia Pacific down 0.4% to 119
- US 10-yr yield down 2bps to 1.74%
- Dollar Index up 0.03% to 98.18
- WTI Crude futures down 0.5% to $32.63
- Brent Futures up 0.7% to $35.35
- Gold spot up 0.9% to $1,233
- Silver spot up 0.7% to $14.80
Top Global News
- Valeant’s CEO to Return From Medical Leave; Guidance Withdrawn: CEO Pearson gives up board chairman role to Robert Ingram
- Foxconn, Sharp Said to Weigh Revising Terms of Approved Deal: Bankers, lawyers are going through a list of Sharp liabilities that could exceed 300b yen
- Boehringer Ingelheim, AbbVie Said in Cancer Partnership Talks: Multi-billion alliance could be announced as soon as this week
- Buffett Seeks More Takeovers, Likens Precision’s CEO to Da Vinci: Investments offer source of funds for “elephant” deals
- Nintendo Falls After Halving Profit Goal on Weak 3DS Sales: Sluggish handheld sales, yen cut earnings
- China Cuts Reserve Requirement Ratio by 0.5 Percentage Point: Says it seeks to maintain reasonable, ample liquidity in financial system
- SpaceX Scraps Another Attempt at Falcon 9 Rocket Launch: “Aborted on low thrust alarm,” according to Elon Musk tweet
- Google Parent Could Gain $3.5b If Intel Wins Tax Dispute: WSJ Says: Alphabet would benefit if Intel wins international tax dispute with IRS
- UTX Adds Goldman Sachs as Adviser Against Honeywell Bid, CNBC Says: UTX on Friday again spurned $90b Honeywell offer
- Hillary Clinton Wins S.C. Democratic Primary, Defeating Sanders: Clinton won state with electorate similar to upcoming contests
- Citigroup Faces Fraud Suit Claiming $1.1 Billion in Losses: Investors in Mexican oil services firm sue over loan schemes
- Lattice Semiconductor Mulls Sale Amid Chinese Interest: Reuters: Co. is working with Morgan Stanley to review interests
- Monsanto Next Logical Target for BASF, Baader-Helvea Says: Monsanto’s seed pipeline, weaker crop protection offering would fit very well with BASF portfolio
- ‘Spotlight’ Wins Oscar Upset in Ceremony Dominated by Race: Favorite ‘Revenant’ gets wins for DiCaprio, director Iñárritu
- ‘Gods of Egypt’ Is Year’s First Big Flop at U.S. Box Office: Lions Gate may not turn profit on $140 million movie
- Starbucks to Open Its First Store in Italy Early Next Year: Percassi will be the licensee for SBUX in the country.
Looking at overnight global market highlights, we start with China were as reported previously, the PBoC cuts the RRR by 50bps to 17.00% in a surprise announcement, however refrains from lowering the lending and deposit rate. Overnight Asian equities traded mixed, following last Friday’s lacklustre lead from Wall St., where US stocks finished in mild negative territory as firmer than expected US GDP data increased rate hike expectations. Nikkei 225 (-1.0%) was dictated by JPY, as the index reversed early firm advances as JPY strengthened during Asia trade. ASX 200 (+0.12%) finished with mild gains amid rising hopes for RBA easing later this year, while mainland China significantly underperformed with the Shanghai Comp (-2.8%) slumping after PBoC continued to weaken the currency. Shenzhen markets were also down nearly 5% on concerns that major reforms such as the Shenzhen-HK connect could be delayed. Prospects of liquidity outflows from the stock market into the recovering property sector and an expected 1.8MM job cuts in the coal and steel industries also weighed on sentiment. 10 year JGBs traded in minor positive territory with the BoJ in the market for JPY 1.26TN, although prices softened from highs in the second half of the session amid thin trade.
Top Asian News
- Telkom Seeks to Slash Workforce by Two-Fifths to Cut Costs: Company identifies about 6,250 positions for elimination
- ChemChina Seeks $35 Billion in Loans for Syngenta Takeover Deal: China Citic Bank to arrange a $15b loan facility; ChemChina to meet lenders this week on separate $20b loan
- Australia Rate-Cut Bets Rise on Stimulus Outlook, Weak Pay Gains: AU wage rises are smallest on record, jobs growth evaporates and firms plan to cut investment
- Yuan Fixings Enigma Returns as PBOC Reverts to Currency Basket: PBOC kept moves in its daily reference rates to a maximum 0.02% most days in the month up to Lunar New Year break
- Zheshang Bank Said to Delay Testing $1 Billion IPO Interest: Stock buyers reported difficulty transferring money out of mainland China
- Modi Budget Key to Breaking March Jinx for India Sovereign Bonds: Benchmark 10-yr yields have risen avg. 18 basis points in last 10 months of March
European equities pulled off worst levels on the back of the surprise action by the PBoC to cut the RRR by 50bps, coupled with the soft EU CPI readings which could force the hand of the ECB to act . Prior to this Eurostoxx had been treading water following the weakness in Chinese stocks amid prospects of liquidity outflows from the stock market. Additionally, financials have underperformed with large caps HSBC (-2.5%) and Standard Chartered (-4.2%) leading the losses, while the latter has been weighed on by concerns that the Shenzhen-HK connect could be delayed. Softness in EU bourses as well as rising ECB stimulus bets have seen bunds bid throughout the mornings to take out the earlier session highs and last Friday’s high around 166.14. Subsequently, bunds printed a fresh all time high (166.46) with yields in the 10-yr falling to the lowest since April.
Top European News
- Euro-Area Consumer Prices Fall Most in Year as ECB Mulls Easing: Inflation rate at minus 0.2% in February vs 0% forecast
- Gameloft Rejects Vivendi’s Valuation of $562 Million as Too Low: Guillemot family to fight Vivendi’s Bollore for control
- Manz Jumps After Deal to Sell 29.9% Stake to Shanghai Electric: Manz to sell new shares to investors to add Chinese partner
- Amazon Steps Up U.K. Grocery Advance With Morrison Supply Deal: To sell hundreds of WM Morrison Supermarkets products
- SNB Could Cut Exemption Limit If More Easing Needed, Jordan Says: Current threshold at 20 times minimum-reserve requirements
- Barclays Africa Shares Plummet as U.K. Parent Said to Mull Sale: Barclays Africa says it still sees growth on the continent
- Swiss Spared New EU Headache as Vote on Foreign Criminals Fails: Rejects initiative to deport foreigners convicted of crimes
In FX, it has been a tentative start to the week, though European trade was following on from an Asian session which saw USD/JPY turnaround sharply. After hitting a wall at 114.00, losses extended through 113.00, but found some support ahead of Friday’s lows before subsequent consolidation received a fresh boost after the PBoC announced it was to cut the RRR by 0.5%. Spot jumped through 113.00, with AUD also turning higher sharply, but topping out around .7165-70 before heading back to pre-announcement levels. At the same time, we also had the release of the EU inflation data, where the Fec core rate fell from 1.0% previously to 0.7%. EUR/USD had already been threatening a retest of the 1.0900 level, and managed to do so after the data. GBP still looking weak vs the USD, but earlier lows intact as yet. CNH and CNY above 6.5500, creeping higher but nothing to concern markets as yet.
Eurogroup chief Jeroen Dijsselbloem said in Shanghai on Saturday that “there was some concern that we would get into a situation of competitive devaluations” with regards to Japan. Japanese Prime Minister Shinzo Abe told parliament Monday he is not trying to influence foreign-exchange rates, and that an excessively strong yen has been corrected under his economic reform program, dubbed Abenomics. The currency was trading around 85 per dollar when Abe took office in December 2012.
China’s yuan declined 0.2 percent, retreating for a seventh day, as the central bank lowered the currency’s reference rate and stepped up efforts to cushion the economic slowdown with the cut in banks’ required reserve ratio.
In commodities, WTI and Brent crude futures have seen somewhat of a turnaround in the wake of the PBoC’s actions, consequently signalling rising global growth prospects in what has otherwise been a rather subdued start to the week in the energy complex. Oil headed for its fourth monthly decline in New York, the longest retreat in a year, as record U.S. crude stockpiles weighed on prices. West Texas Intermediate fell 0.3 percent to $32.67 a barrel, extending February’s decline to 2.9 percent. Brent crude added 0.5 percent to $35.28 for an increase of 1.6 percent this month.
Record-high stockpiles of U.S. natural gas for the time of year sent futures 4.8 percent lower to $1.706 per million British thermal units, extending a fourth weekly decline as mild winter limited the drawdown.
Copper erased a decline of as much as 1.3 percent after the China central bank stimulus, leaving it little changed at $4,706 a metric ton.
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DB’s Jim Reid concludes the overnight wrap
tomorrow we’ll give a full performance review but with a day left the highlights are a US equity market that has just edged back into positive territory for February, leaving mainland Europe behind (generally down 2-7% still). US 10yr yields are nearly 20bp lower, with Bunds nearly 30bps lower in what is the standout move on the month! Meanwhile Oil is pretty much flat with Chinese equities wiping out monthly gains after a steep late month sell-off. Anyway, full review tomorrow.
The overall numbers mask a strong rebound in risk (and oil) since around Feb 11th, although bonds haven’t sold off much since. Although the dates don’t exactly coincide it’s worth highlighting that US data surprises troughed in early February after a poor run but are now at around their highest level since early December. So this has helped risk and helped US out-performance. Meanwhile European data surprises continue to plummet and to their lowest since 2013 in the comparable indices to the US data. Our own DB SIREN-Surprise index hit 2012 lows on Friday. So although markets have stabilised in the last 2-3 weeks, it’s clear that Europe seems to be losing momentum over a period where the banking industry is under pressure with the risks that this could spill over into the wider economy. As such the pressure is still on the ECB to deliver next week even if markets have stabilised. The question mark is whether a straight cut deeper into negative deposit rate territory would be counterproductive or not alongside amendments to QE. So they may need to be innovative as to how they ease policy further.
As we’ll see in the week ahead we have the all important global manufacturing PMIs/ISM on Tuesday and non-manufacturing equivalents on Thursday. The keys things to watch out for are any stabilising in global manufacturing and whether services continue to trend down towards them but whether a notable (albeit narrowing) gap can be maintained. Obviously services typically make up 80-90% of DM economies and whether this part of economies can withstand the various shocks thrown at it of late will be key to asset prices going forward.
Over the weekend we saw the latest G20 meeting conclude with nice sound bites but without much obvious substance. The group agreed to use “fiscal policy flexibility to strengthen growth, job creation and confidence” and reiterated that “monetary policy alone cannot lead to balanced growth”. However as an example of the issues, UK Chancellor Osbourne warned on Friday of imminent and renewed spending cuts in his budget in two weeks and there is no obvious sign of notable loosening of the fiscal spigots anywhere else. However it does seem the debate is slowly shifting back towards fiscal over monetary policy which in our opinion is healthy. It may take a recession to focus minds properly though.
The underwhelming G20 meeting is contributing to a soft start to the week in Asia with Chinese equities leading the way (Shanghai Comp -3.5%) with the Yuan edging lower for the 7th successive session. Comments on Friday from PBoC chief Zhou that there was room for more easing had led some to hope they would announce more stimulus over the weekend but this didn’t materialise. Elsewhere the Hang Seng is -1.2% and the Nikkei is -0.2%.
Looking back to Friday, we saw European equity markets ignore weak numbers out of Europe (see below) and ride a rally in mining and oil shares on the back of a recovery in the commodities complex. The STOXX and the FTSE300 closed up +1.53% and +1.72% respectively while the FTSE100 stocks posted gains of +1.38%, as markets ended the week in positive territory despite Wednesday’s slump. In bond markets, European yields continued to be firm as weak inflation data out of Europe further raised expectations for next week’s ECB meeting. German 10Y yields (+0.9bp) were largely flat on the day but yields were cumulatively tighter on the week. This signified the sixth consecutive weekly gain for 10yr bunds. iTraxx Senior (-9.1bp) and Sub (-25.1bp) spreads also tightened on Friday, ending the week -8bps and -25bps respectively. In the US the S&P 500 closed -0.19% after edging steadily lower all day from a bright open.
Staying with the US and adding to the recent positive surprises discussed above, economic data out of the US on Friday generally exceeded expectations, albeit with some caveats. Annualised Q4 GDP growth was revised up to +1.0% qoq (vs. +0.4% expected) from the previous estimate of +0.7% on the back of an upward adjustment to business inventories. Although positive, the growth mix encouraged the Atlanta Fed to lower its Q1 GDPNow forecast to 2.1% from 2.5% after the expected inventory component fell -0.6% offsetting a +0.2% increase in consumer spending. Back to Friday’s data, while personal consumption growth for January missed expectations (+2.0% vs. +2.2% expected), personal spending rose by the most in eight months (+0.5% vs. +0.3% expected vs. 0.0% previous) and the PCE Deflator returned to inflationary territory (+0.1% mom actual vs. +0.0% expected; -0.1% previous). Consumer sentiment for February (as measured by the UMichigan Sentiment indicator) also improved more than projected, as the index hit 91.7 (vs. 91.0 expected; 90.7 prior). A negative mark amid the positive data was the US advance goods trade balance for January which saw the trade deficit widen to -U$62.2bn (vs. -U$61.2bn expected; -U$61.5bn previous) on the back of weaker global economic activity.
European data on the other hand largely disappointed across the board and continued setting the stage for further ECB easing. First, the relatively good news: French Q4 GDP grew at +0.3% qoq (vs. +0.2% expected) as household spending rebounded faster than expected. Now for the bad news – and there’s lots of it. Germany and France both saw deflation with HICP numbers clocking in at -0.2% YoY (vs. 0.0% expected) and -0.1% YoY (vs. +0.1% expected) respectively. Euro Area economic confidence slumped to its lowest level since June (103.8 actual vs. 104.3 expected; 105.0 previous) while the business climate indicator (0.07 actual vs. 0.27 expected; 0.29 previous), industrial confidence (-4.4 actual vs. -3.6 expected; -3.2 previous) and services confidence (10.6 actual vs. 11.4 expected; 11.6 previous) all declined more than expected.
Kicking off proceedings this morning is the UK where we’ll get the January net consumer credit and mortgage approvals data. Shortly following that will be the February estimate for Euro area CPI (+0.1% mom expected) along with the same data out of Italy. This afternoon in the US there will be a lot of focus on the February Chicago PMI number, while the Dallas Fed manufacturing activity index and January pending home sales data will also be released.
via Zero Hedge http://ift.tt/1oSsTPT Tyler Durden