After weeks of relentless flashing red headline barrage whose only purpose was to force snap algo buying of the USDJPY pair time after time after time, Japan is once again out of FX algo danging carrots after moments ago Abe confirmed what everyone had known already: he called a snap election to seek a mandate for his decision to delay by 18 months a further sales-tax increase that had been planned for next year; he also said he would dissolve the lower house of parliament on Nov. 21 in preparation for an election in December, without specifying a date. Cited by the WSJ, Abe said “To ensure the success of Abenomics, I’ve concluded that it shouldn’t be carried out next October and instead be postponed by 18 months,” the prime minister told a nationally televised news conference, stressing that the additional tax burden would risk putting the economy back into deflation. “I will seek the people’s judgment over our economic policy.”
What was left unsaid is that at the very same time the ruling party effectively bribed the population to vote for it after Japan’s FinMin Aso said the government would prioritise passing through parliament a supplementary budget for the current fiscal year to fund a stimulus package, which media reports have said could be worth 2-3 trillion yen (which actually is just a rather tiny $17-$26 billion).
So while Abe is running on hopes that the people will vote for less taxes and more fiscal spending – because the last thing the country with the 230% debt/GDP and which is monetizing all of its debt issuance is, gasp, more austerity – the people may just decide to get rid of him altogether not for his endless barage of promises about the future but for his constant failures in the real world, such as goosing the market by $1 trillion and only getting only lousy recession to show for it.
Bottom line, as Bloomberg noted:
- ABE: LOSS OF MAJORITY WOULD BE REJECTION OF ABENOMICS
And if indeed people vote with their wallets and the electric, food and gas bills on December 14, when Goldman believes the vote will take place, Abe is voted out, watch as the global asset reflation spectacle comes crashing down to earth.
That said, the market reaction was hilarious: one USDJPY regained all the losses from yesterday’s shocking quaruple-dip announcement, and touched 117, then that old “sell the news” kneejerk reaction kicked in just as Abe was holding his press conference. And then, to remind everyone that we live in the new normal after all, the USDJPY was quickly BTFD. End result: a 100 pip move in seconds.
Perfectly normal.
The best news is that no more will the USDJPY jump by 20-100 pips when the very same headline is regurgitated at strategic market inflection points. At least not until Japan comes up with yet another dangling carrot to goose the ever-trigger happy algos.
Elsewhere in Europe, European equities trade in the green with gains of 0.75-1.0% with sentiment largely buoyed by the ongoing events in Japan. More specifically, PM Abe is to delay the sale-tax hike and dissolve Parliament. However, Abe is yet to confirm as to whether or not he will prepare a stimulus package in lieu of the recent GDP numbers. In index specific moves, the IBEX outperforms after being led by Abengoa (+12%) in a pull-back of recent heavy losses with little other major stocks news on offer as European earnings season draws to a close. Elsewhere, fixed income products traded relatively unchanged for a large part of the session until the German ZEW survey which saw the headline expectations figure exceed forecasts by coming in at 11.5 vs. Exp. 0.5 and thus extended the move higher for European equities while dragging fixed income products lower into negative territory.
In summary, European shares rise, close to intraday highs, with the oil & gas and chemicals sectors outperforming and travel & leisure, personal & household underperforming. Japan’s Abe says he’ll dissolve parliament, delay tax hike. German ZEW November investor expectations above estimates. European car sales rise for 14th straight month. Greece’s bailout review said to stall. The German and Spanish markets are the best-performing larger bourses, Swedish the worst. The euro is stronger against the dollar. Japanese 10yr bond yields rise; Greek yields increase. Commodities gain, with natural gas, copper underperforming and gold outperforming.
In Asia, Chinese equities are generally trading weaker following somewhat disappointing home price data whilst bourses are mostly mixed elsewhere. The print has done little to boost sentiment following news that home prices have dropped in 69 out of 70 cities in October relative to September and the average is now 2.6% lower versus last year. The CSI 300 is 1.1% lower as we type whilst the Hang Seng, Kospi and ASX 200 -1.0%, +1.1% and -0.2% respectively. Also in China, Bloomberg yesterday reported that the PBOC has issued rules allowing local financial institutions to invest in yuan assets abroad and in the meantime has refrained setting any limits on the amount that can be invested.
The US docket brings both the PPI and the NAHB housing market index reading. On the former, the market is expecting a -0.1% mom headline number. Away from the data prints, the Fed’s Kocherlakota will be speaking on monetary policy outlook this afternoon, whilst in Europe we will hear from the ECB’s Lautenschlaeger and Knot.
Bulletin headline summary
- European equities trade firmly in the green following on from the latest policy announcements in Japan, while the German ZEW survey surprises to the upside.
- USD/JPY edged higher throughout the session upon anticipation of the announcements from Japan before pulling away from 117.00 in a buy the rumour, sell the fact fashion as the policy decisions were largely priced in by the time they were announced.
- Looking ahead, attention turns towards US PPI data, API inventories and any comments from ECB’s Knot, Fed’s Kocherlaktoa and BoE’s Forbes.
Japan’s Abe called for an early election and delayed for 18 months a second planned sales-tax increase as he sought to extend his term and salvage his Abenomics policies after the country slipped into recession
German investor confidence rose for the first time in 11 months as the ZEW index increased to 11.5 in November (est. 0.5) from -3.6 in October
U.K. inflation unexpectedly accelerated last month as transport prices fell less than a year earlier and the cost of toys rose in the run-up to Christmas
Greece’s government and its international creditors are deadlocked over a final round of measures required to release the last tranche of the country’s bailout, two people familiar with the negotiations said
Chinese new-home prices dropped in October in 67 of 70 cities tracked by the government from a year earlier, according to the National Bureau of Statistics; prices in Beijing declined 1.3%, the first annual decrease since November 2012
Reserve Bank of Australia governor Stevens sees accommodative policy continuing for some time, cites spare capacity, controlled inflation
Even if Mary Landrieu (D-LA) is able to win passage of her Senate bill tonight to approve the Keystone XL oil pipeline, analysts said it may not be enough to affect the outcome of her re-election bid
Goldman says it’s adding staff to its European ABS business as the bank prepares for a resurgence in the $305b market that shrank more than 40% over the past four years
Sovereign yields mixed. Asian stocks mixed, Nikkei +2.1%, Shanghai -0.7%. European stocks gain, U.S. equity-index futures decline. Brent crude gains, copper little changed, gold +1.4%
US Economic Docket
- 8:30am: PPI Final Demand m/m, Oct., est. -0.1% (prior -0.1%)
- PPI Ex-Food and Energy m/m, Oct., est. 0.1% (prior 0.0%)
- PPI Final Demand y/y, Oct., est. 1.3% (prior 1.6%)
- PPI Ex-Food and Energy y/y, Oct., est. 1.5% (prior 1.6%)
- 10:00am: NAHB Housing Market Index, Nov., est. 55 (prior 54)
- 4:00pm: Net Long-term TIC Flows, Sept. (prior $52.1b); Total Net TIC Flows, Sept. (prior $74.5b)
- 1:30pm: Fed’s Kocherlakota speaks in St. Paul, Minn.
Market Wrap
- S&P 500 futures down 0.1% to 2037.4
- Stoxx 600 up 0.6% to 339.2
- US 10Yr yield down 1bps to 2.33%
- German 10Yr yield down 1bps to 0.8%
- MSCI Asia Pacific up 0.6% to 140.6
- Gold spot up 1.3% to $1201.5/oz
FX
Following the expectations of announcements from Japan, USD/JPY ebbed higher throughout the session and in close proximity to the 117.00 handle, however, the pair proceeded to pull away from these levels as by the time they were announced the news was already priced into the market. Nonetheless, this move to the downside was halted by talk of leveraged names on the bid in the pair. GBP/USD traded higher following the last UK inflation report which saw the Y/Y CPI figure come in at 1.3% vs. Exp. 1.2% and thus avoided the dovish surprise that some had been expecting in the backdrop of last week’s QIR which warned that inflation could drop below 1.0% in the next 6 months. Elsewhere, broad-based USD strength has led EUR/USD to consolidate its move above 1.2500. Furthermore, the EUR strength has seen EUR/AUD trade higher by over 100 pips with the move to the upside exacerbated by comments from RBA governor Stevens who said a further AUD fall is likely to happen.
COMMODITIES
WTI and Brent crude prices enter the North American crossover in the green in a modest recovery of recent losses ahead of the upcoming OPEC meeting. In terms of notable commentary the Russian and Venezuelan oil ministers are said to be planning a meeting whereby they will discuss the need to coordinate actions in defence of prices. Furthermore, one thing for energy traders to keep an eye on today is the US Senate vote on the future of the Keystone XL pipeline, whereby those in favour of the bill need to secure 60 votes to prevent a filibuster by opponents. Elsewhere, spot gold broke above USD 1,200 to print its highest price this month alongside the weaker USD and fresh geopolitical concerns from the Israeli/Palestine situation. More specifically, Israel’s Netanyahu says Israel will react with an `iron fist` to an attack where 4 Israelis were killed and several others wounded in a terror attack in a synagogue in the western Jerusalem neighbourhood of Har Nof.
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Deutsche Bank’s Jim Reid completes the overnight recap
Did Government QE in Europe get closer yesterday? It probably did slightly after Draghi comments to lawmakers at the European Parliament but to be honest markets are probably going to need more to be convinced that it will eventually happen. We still think Q1 2015 is the likely announcement time as taboos are being slowly broken down. To recap what Draghi said in his quarterly testimony, he said “Other unconventional measures might entail the purchase of a variety of assets, one of which is sovereign bonds”. He did say monetary policy alone can’t bring the economy back on track but it’s clear to us that the ECB are edging closer to action. Markets in Europe certainly appreciated the comments. The Stoxx 600 closed the day +0.48%, although traded as low as -0.8% pre-statement whilst peripheral assets finished stronger with 10yr yields in Spain, Italy and Portugal rallying 1bp, 4bps and 4bps respectively. The ECB’s Mersch was also dovish earlier, suggesting that the central bank could theoretically purchase a range of assets including sovereign debt, gold and ETFs. However his comments were a little more caveated than Draghi’s noting that such a decision must be subject to a cost-benefit analysis.
In Japan this morning the market has turned its focus away from yesterdays GDP print and onto a report from the Japanese Yomiuri newspaper suggesting that Abe could hold a press conference as soon as today with regards to delaying the sales tax increase. Following this we’ve also had a news report out of the Nikkei Review suggesting that the Prime Minister is expected to tell his ministers today to assemble a stimulus package focusing on consumer spending. The package is expected to total ¥2tn to ¥3tn with the aim of stimulating what has been fairly subdued consumer spending over recent times. Bloomberg and other wires are also suggesting that he will call an early election today with December 14th mooted as a possible date. The market appears to be expecting some sort of confirmation of the above packages with the Nikkei +2.2% and Topix +2.1% as we type.
With the news from yesterday that Japan is back in recession again it got us thinking about our shorter business cycle theory that we established back in 2010. The theory has worked spectacularly well across pretty much most of the DM world apart from the most important country namely the US. However outside the US, parts of Europe have been in and out of recession since and yesterday it re-claimed another victim with Japan in recession again for the third time post-GFC. The theory was based on the ‘great moderation’ (1980-2008) super cycles being driven by total flexibility of monetary and fiscal policy and that post crisis both would be far less able to be stretched at will. Most governments were looking to be or being forced to be more disciplined fiscally with a liquidity trap at the zero bound preventing monetary policy being used anywhere near as effectively as it had been during the prior decades. Policy has indeed been compromised but what we’ve also learned from this period is that fiscal is perhaps more important for growth and monetary policy for asset prices. The US maxed out on both beyond what most would have thought possible which helped avoid our shorter cycle theory and pump up asset prices whereas Europe implemented austerity around 2011/2 and Japan raised taxes earlier this year. Both sparked recessions. So we think the theory is still a valid one unless you’re able to max out on stimulus beyond what anyone would have thought possible a few years back. The US has been virtually the only country to so far pull this off and maybe the only country that might manage to do so.
Anyway back to looking at the rest of Asia this morning. Chinese equities are generally trading weaker following somewhat disappointing home price data whilst bourses are mostly mixed elsewhere. The print has done little to boost sentiment following news that home prices have dropped in 69 out of 70 cities in October relative to September and the average is now 2.6% lower versus last year. The CSI 300 is 1.1% lower as we type whilst the Hang Seng, Kospi and ASX 200 -1.0%, +1.1% and -0.2% respectively. Also in China, Bloomberg yesterday reported that the PBOC has issued rules allowing local financial institutions to invest in yuan assets abroad and in the meantime has refrained setting any limits on the amount that can be invested.
In terms of the rest of markets yesterday, with headlines dominated by Draghi it was easy to overlook what was a relatively solid expansion in the Eurozone September trade balance surplus to €17.7bn from €15.4bn in August. Over in the US the S&P 500 continued its trend of modest gains, closing +0.07% on the day. After a recent flurry of strong data, readings yesterday were fairly disappointing with misses in empire manufacturing (10.16 vs. 12 expected), industrial production (-0.1% vs. +0.2%) and capacity utilization (78.9% vs. 79.3% exp.). Elsewhere a research paper from the San Francisco Fed mentioned that inflation will remain low in the near future with the ‘probability of low inflation by the end of 2016 being twice as high as the probability of high inflation’. Just wrapping up market moves, the Dollar closed stronger on the day versus most major currencies, with the DXY +0.47% whilst both WTI and Brent extended declines, down -0.42% and -0.47% respectively.
Looking at the highlights today we will kick off with the CPI/RPI/PPI prints out of the UK. Our UK colleagues argued that the market reaction to the latest BoE November inflation report in which markets priced out the chances of an early tightening was not an appropriate response to what was said in the report. Instead they suggest that the Bank remains optimistic about economic growth despite Eurozone concerns and continues to see inflation rising back to target over the horizon forecast, supported by better wage inflation numbers. So it’ll be interesting to see how the market reacts to today’s figure. We will also be keeping an eye on the ever-important ZEW survey reading out of Germany and the Eurozone. In the afternoon our focus will cross to the other side of the pond where we will get both PPI and the NAHB housing market index reading. On the former, the market is expecting a -0.1% mom headline number. DB’s Joe Lavorgna shares the same forecast and as mentioned in yesterday’s report, notes that investors should keep a keen eye on the price data for ‘selected healthcare industries’ which is used to estimate the healthcare component of the PCE deflator. Away from the data prints, the Fed’s Kocherlakota will be speaking on monetary policy outlook this afternoon, whilst in Europe we will hear from the ECB’s Lautenschlaeger and Knot..
via Zero Hedge http://ift.tt/1EYXRZ3 Tyler Durden