Those algos who scrambled to paint yesterday’s closing tape with that last second VIX slam sending the S&P back over 2,000, forgot one thing – the same thing that China also ignored – central bankers can not print trade, something we have repeated since 2011. The world got a harsh reminder of this last night when China reported the third largest drop in exports in history, which crashed by over 25%, the third biggest drop on record, and no, it was not just the base effect from last February’s spike, as otherwise the combined January-February data would offset each other, instead it was a joint disaster, meaning one can’t blame the Lunar New Year either. In short, one can’t really blame anything aside from the real culprit: despite all the lipstick that has been put on it, global trade is grinding to a halt.
This, together with fresh record low (and mostly negative) yields along Japan’s JGB curve, brought the risk off sentiment out of hibernation, and have sent the USDJPY sliding in overnight trading, and dragging European stocks and U.S. equity futures down with it.
Furthermore, after Goldman doubled-down on its bearish call on commodities, the sector has taken a deep breather after yesterday’s surge, and while crude oil has dipped by about 1%,iIron-ore futures on the Singapore Exchange fell 8.8% after yesterday’s record 19% jump on Monday. Citigroup Inc. said it’s still bearish as supply and demand fundamentals remain weak, while Axiom Capital Management Inc. said the price surge was probably just a “blip.”
Promptly bearish commentators came out of the woodwork, first in Asia…
“If they can’t get stocks right, how are they going to get the trickier puzzle of SOE reform right?” Michael Every, the head of financial markets research at Rabobank Group in Hong Kong, who correctly predicted the tumble in Chinese equities told Bloomberg. “The government’s attempts have been a total failure, leading to a huge drop in confidence among investors.”
… and then in Europe:
“We are still in the process where we’re trying to find the bottom and I don’t think we are there yet,” said Ralf Zimmermann, a strategist at Bankhaus Lampe in Dusseldorf, Germany. “There had been, with the recent rebound, some optimism that we were out of the woods. The Chinese trade data is a reminder that the path for the business cycle ahead is pretty rocky and bumpy.”
As a result, global equities’ five-day winning streak has, as of this moment, come to a halt. Japanese government bonds surged in a haven-asset rally that also lifted the yen, gold and Treasuries.
In summary, the Stoxx Europe 600 Index extended its decline from a five-week high as investors sold equities that had led the recent rebound, while Brent crude slid after closing on Monday above $40 a barrel for the first time this year. Industrial metals sank and iron ore fell as Goldman Sachs Group Inc. predicted gains in commodities would falter. A jump in Japanese bonds that sent yields to record lows helped boost Treasuries and European debt. The yen strengthened against all of its 31 major peers and gold climbed to a 13-month high.
However one bearish commodity which never went into hibernation and which has been rising even alongside stocks, has been gold, and as the following Bloomberg chart shows, “gold rally belies confidence in stocks” having outperformed global equities.
Perhaps “gold vigilantes” are the new bond vigilantes?
* * *
Where global markets stand now:
- S&P 500 futures down 0.8% to 1985
- Stoxx 600 down 1.4% to 336
- FTSE 100 down 0.8% to 6130
- DAX down 1.4% to 9642
- German 10Yr yield down 6bps to 0.17%
- Italian 10Yr yield down 3bps to 1.43%
- Spanish 10Yr yield down 2bps to 1.57%
- S&P GSCI Index up less than 0.1% to 324.4
- MSCI Asia Pacific down 0.7% to 125
- Nikkei 225 down 0.8% to 16783
- Hang Seng down 0.7% to 20012
- Shanghai Composite up 0.1% to 2901
- S&P/ASX 200 down 0.7% to 5108
- US 10-yr yield down 7bps to 1.84%
- Dollar Index down 0.04% to 97.03
- WTI Crude futures down 0.8% to $37.60
- Brent Futures down 0.6% to $40.60
- Gold spot up 0.7% to $1,276
- Silver spot up 0.1% to $15.66
Top Globa News
- Michael Bloomberg Says He Won’t Run for President in 2016: Decided against running out of concern that his entry could benefit Republican front-runner Donald Trump
- Wells Fargo Said to Join Swaps Revival as Funds Clamor to Hedge: Bank plans to trade derivatives known as single-name credit default swaps with clients as soon as next quarter.
- Vale, Fortescue Game-Changing Deal to Shake Up Big Iron Ore: Pact includes plans to develop joint ventures to create about ~80mt-100mt per year of blended product.
- Pimco Says Time to Buy Riskier Debt as U.S. to Avoid Recession: Pimco says high-quality company debt, junk bonds, bank loans offer a better risk-adjusted alternative.
- Goldman Says Commodity Rally a False Start, Will Fizzle: rally in commodities from iron ore to gold will falter; forecasts copper, aluminum prices will slide as much as 20% over next year.
- Nike Suspends Ties With Sharapova After She Fails Drug Test: Co. suspended ties with after she failed a drug test at the Australian Open.
Looking at regional equity markets, we start in Asia where stocks traded negative with sentiment dampened following a contraction in Japanese GDP figures (Japanese GDP SA (Q4 F) Q/Q -0.30% vs. Exp. -0.40% vs Prey. -0.40%) and weak Chinese Trade data. Nikkei 225 (-0.76%) was pressured following soft Japanese GDP which showed the economy contracted by an annualised 1.1 %, while JPY strength also added to the downbeat tone.ASX 200 (-0.53%) failed to sustain the commodity-led gains amid profit-taking in the sector and weakness in financials. The Shanghai Comp (+0.1%) initially traded lower after weak Chinese trade data in which exports declined wider than expected, while some analysts also noted disappointment regarding a lack of significant measures announced at the NPC so far. However, losses were pared heading into the European open. 10yr JGBs rose as the risk-averse tone underpinned demand while today also saw a strong 30yr JGB auction where the b/c printed at its highest since May 2014 as participants hunt for positive yields. Recapping China’s trade data, the February Trade Balance came in at CNY M/M 209.50B vs. Exp. 341.00B (Prey. 406.20B)
- Exports (CNY) (Feb) Y/Y -20.60% vs. Exp. -11.30% (Prey. -6.60%)
- Imports (CNY) (Feb) Y/Y -8.00% vs. Exp. -11.70% (Prey. -14.40%)
In Europe, sentiment this morning has been guided lower by downbeat data from overnight, with Japanese GDP and Chinese trade balance readings failing to inspire confidence in financial markets . As such, European equities trade firmly in negative territory (Euro Stoxx: -1.3%), with the materials sector the most significantly impacted by China concerns. As such, the usual culprits of Anglo American, BHP Billiton, Glencore are among the worst performers, while Burberry are among the best performers after the FT reported that the Co. are looking for help to defend against a potential takeover. In line with the softness seen in equities, Bunds have seen strength so far today, with the June’16 contract strengthening by over 50 ticks to rise back above 163.00. Analysts at IFR suggest model driven accounts are lifting both Bunds and Gilts, while Japanese buying of core/mid-tier markets is evident in 10Y OATs.
Top European News
- Burberry Surges on Speculation Trenchcoat Maker May Attract Bid: Co. asked advisers at Robey Warshaw to help prepare for bid after mystery investor built up ~5% stake: FT.
- German Industrial Production Surges by Most Since 2009: Production, adjusted for seasonal swings, climbed 3.3% m/m.
- RWE Posts Loss at U.K. Business After Customer Defections: U.K. unit is to cut 2,400 jobs as it reported FY loss after billing system failures, departure of >350,000 utility customers.
- Apple’s Clash With FBI Risks Piercing Trust in EU Privacy Shield: EU privacy regulators promised to give their verdict next month on so-called privacy shield deal.
- EU Nears Migrant Cap Deal as Turkey Raises Its Asking Price: Turkish PM called on EU to double its financial aid to Turkey to EU6b.
In FX, after some volatile moves in NY and Tokyo, the early European session has been much more contained in FX, though notable is the heavy tone in spot and cross JPY, while the AUD now looks to be on the back foot after some decent data led strength of late. USD/JPY lows have so far reached just shy of 112.70, but so far, all recovery attempts have come up against decent offers through 113.00. AUD/USD stopped shy of .7500 yesterday, and now looks under threat of testing the lows from yesterday to dent a potential move to recent .7700+ projections. The USD index is pretty stable as a result, with EUR looking buoyant against the greenback, with further potential seen on the upside despite anticipated policy action from the ECB; the crosses also recovering off recent lows. GBP is looking heavy also, with the upper 1.4200’s well offered in Cable. WTI/Oil gains capped, turning USD/CAD back onto the 1.3300’s.
China’s yuan climbed 0.17 percent as the central bank raised its daily reference rate for the currency following Monday data that showed a slide in the nation’s foreign-exchange reserves moderated in February. The currencies of raw-material producing nations slumped, led by South Africa’s rand dropping more than 1 percent. New Zealand’s dollar fell 0.7 percent, while Australia’s slid 0.5 percent.
The yen gained for a second day. Bank of Japan Governor Haruhiko Kuroda told parliament on Monday he doesn’t think additional stimulus is needed at the present time. “The yen is gaining partly because Kuroda is denying imminent further easing,” said Shinichiro Kadota, a foreign-exchange strategist at Barclays Plc in Tokyo. “That’s effectively telling speculative players to go ahead and buy the yen.”
In commodities, oil prices pulled back from yesterday’s best levels with WTI back below USD 38/bbl level amid weak Chinese trade data. Gold retreated from near 13-month highs to trade flat and copper prices were also pressured from weak China data, while Dalian iron ore futures continued its upward trend to hit limit up at the open following yesterday’s largest gain in spot iron ore prices on record.
In commodities, Iron-ore futures on the Singapore Exchange fell 8.8 percent, after a record 19 percent jump on Monday. Citigroup Inc. said it’s still bearish as supply and demand fundamentals remain weak, while Axiom Capital Management Inc. said the price surge was probably just a “blip.” Copper fell 1 percent in London, trimming this month’s advance to 5.4 percent. Nickel slid 2.8 percent, retreating from its highest close since November. Goldman Sachs reiterated its view that the drivers for last year’s slump in industrial metals prices remain intact, predicting drops of as much as 20 percent for copper and aluminum over the next 12 months.
Gold last week entered a bull market — commonly defined as a 20 percent advance from the most recent low — and platinum and palladium followed suit on Monday. Platinum rose 0.2 percent on Tuesday, while palladium dropped 1.8 percent. Brent crude slipped 0.5 percent in London to 40.65 a barrel, after surging 5.5 percent on Monday. It has advanced more than 40 percent since slumping to a 12-year low in January amid speculation a proposal by major producers to freeze production will trim a global glut. Data on Wednesday is forecast to show U.S. stockpiles increased last week to the highest level since 1930.
On today’s thin US calendar we have last month’s NFIB small business optimism survey reading as only release of note, which moments ago printed at 92.9, below January’s 93.9 and below the expected rebound to 94.0.
Bulletin Headline Summary from RanSquawk and Bloomberg
- European bourses take the lead from their Asian counterparts as soft Japanese GDP and Chinese trade data dictates the state of play
- In FX, JPY has been a beneficiary of the risk-averse tone with USD/JPY breaking back below 113.00 while commodity currencies face selling pressure
- Looking ahead, highlights include US API data, BoE’s Weale and US 3yr Note Auction
- Treasuries higher in overnight trading, global equities sell off after China’s exports tumbled 25.4%, the biggest decline since May 2009; week’s auctions begin with $24b 3Y notes, WI 1.065% vs 0.844% in Feb., was lowest 3Y auction stop since 0.802% in March 2014.
Mark Carney was accused of jeopardizing the Bank of England’s credibility in the EU debate as pro-“Brexit” lawmaker Jacob Rees-Mogg said the central bank’s report on the topic supported the government’s position of remaining part of the bloc - An increase in investment and higher domestic spending helped propel the euro-area to its 11th successive quarter of growth as overall the economy grew 0.3% in the fourth quarter
- German industrial production in January climbed 3.3% from the prior month, the most in more than six years, in a sign that strong domestic demand may be helping to underpin output even as external trade cools
- European Union leaders edged toward an agreement with Turkey to halt the inflow of migrants, with the Turkish government jacking up the price for serving as the EU’s defensive barrier
- Cyprus FM Georgiades said he’s confident in his country’s ability to access the bond market, after the government won the blessing of its European partners and the IMF to exit a three-year-old aid program with no safety net
- Michael Bloomberg, the billionaire former three-term mayor of New York, said he’s decided against entering the 2016 presidential race. Bloomberg is the founder and majority owner of Bloomberg News parent Bloomberg LP
- $11.52b IG corporates priced yesterday; MTD volume $53.345b, YTD $347.595b
- No HY priced yesterday, $3.65b priced last week, $16.33b YTD
- Sovereign 10Y bond yields mostly lower led by Greece (-39bp); European, Asian markets lower; U.S. equity-index futures drop. WTI crude oil, copper fall, gold rallies
US Event Calendar
- 6:00am: US NFIB Small Business Optimism Falls to 92.9; Est. 94, Last 93.9
- 11:30am: U.S. to sell $60b 4W bills
- 1:00pm: U.S. to sell $24b 3Y notes
DB’s Jim Reid concludes the overnight wrap
I was a bit confused about yesterday. Markets were seemingly weak early on due to perceived disappointment about the scale of China’s fiscal impetus discussed over the weekend at the NPC even though our own Zhiwei Zhang thought it was in line with expectations. However in parallel Iron Ore was catapulted 18.59% higher (the largest single day gain with daily data going back to 2009) on hopes that the weekend showed China’s willingness to boost economic growth. Go figure.
In fact, Iron Ore has been one of the most impressive performing commodities this year and with yesterday’s move is now up 46% YTD so far as well as a massive 66% from the record lows made back on December 11th last year. Much of the commentary suggested yesterday’s move reflected to some degree a replenishing of Chinese steel mills supplies ahead of the ramping up of the summer construction season, as well as aggressive moves in Steel prices in expectation of demand recovery triggered by property policies and also abundant liquidity in the system. While similar commentary still remains cautious on the sustainability of such gains for now, further news overnight of a possible joint-venture of sorts between two of the biggest four producers, Fortescue and Vale, is keeping the market squarely in the spotlight for now.
Not to be outdone, Oil markets also continued their strong surge of late yesterday. WTI and Brent rallied +5.51% and +5.48% respectively with the former closing back in on $38/bbl and the latter ending the day back above $40/bbl for first time since December 9th. Sentiment was boosted after the news of another drop in the number of operating rigs last month while expectations continue to build ahead of a potential meeting between OPEC and non-OPEC producers later this month. In fact, the latest move has now seen WTI move into positive YTD territory (+2.21%) for the first time this year with Brent (+9.55%) already well through that level.
In fact, it’s now proving harder to find a commodity which isn’t posting positive YTD returns. Copper (+6.27%), Aluminium (+6.14%), Nickel (+6.41%) and Zinc (+12.52%) are all up for the year helped by the big rally this month, while even more impressive have been moves in precious metals with the well documented move for Gold (+19.50%) this year in particular eye-catching. Silver (+13.00%) is also up strongly while Platinum (+11.85%) and Palladium (+2.38%) have now entered bull markets. The laggards to the rally have come in agriculture with the likes of Corn, Wheat, Sugar and Cotton down single digits still. In any case, some staggering moves considering the extent of the selloff earlier this year.
So, despite that bumper day across commodity markets yesterday, declines across tech and consumer names tempered any hope for a material equity market rally. That said, the S&P 500 (+0.09%) did manage to nudge into positive territory by the close of play, bringing its run of consecutive daily gains to five now and matching the run made in October last year. Prior to this, a rough day for Italian Banks saw European equities edge lower however, with the Stoxx 600 closing -0.25% and Italian equity market down -1.20%, while credit markets on both sides of the pond enjoyed a marginally better day.
Glancing at our screens this morning, despite the commodity rally yesterday it’s been a rough start across most bourses in Asia with some softer than expected trade numbers out of China having their say. With regards to the data, China’s exports (in US Dollar terms) declined a much greater than expected -25.4% yoy (vs. -14.5% expected) in February, down from -11.2% in January and only slightly less than the record contraction back in May 2009 (of -26.4%). Imports also tumbled more than expected (-13.8% yoy vs. -12.0% expected) although that contraction was less than that seen in January. All told the data has seen the trade surplus shrink to $32.6bn from $63.3bn. The data in CNY terms shows a similar pattern with exports down -20.6% yoy (vs. -11.3% expected) and to a record low.
Bourses in China were already trading with a soft tone with the Shanghai Comp tumbling as low as -3.37% prior to the data, although it has rebounded into the midday break, albeit still down -1.55% on the day. The CSI 300 is -1.69%, while the Hang Seng is -0.74%, Kospi -0.68% and ASX -0.68%. In Japan the Nikkei is down -0.51% despite the second read of Japan’s Q4 GDP print being revised up unexpectedly by one-tenth to -0.3% qoq. Oil markets have receded a percent or so, while US equity futures are down half a percent.
Moving on. Yesterday’s Fedspeak offered two very differing opinions ahead of next week’s FOMC meeting. Fed Vice-Chair Fischer played down the suggestion that the link between strong employment and inflation was broken, saying that although the link has never been very strong, ‘it exists and we may well at present be seeing the first stirrings of an increase in the inflation rate’. Meanwhile, speaking at a separate conference in Washington, Fed Governor Brainard opined that ‘I am heartened by the continued strong progress on employment and the resilience of American consumers, which stand against a considerably more challenging global backdrop’. That said, she also warned that ‘we should not take the strength in the US labour market and consumption for granted’ and that ‘sources of robust demand around the globe are few, and sources of weakness relatively greater’. Brainard also cautioned that ‘tighter financial conditions and softer inflation expectations may pose risks to the downside for inflation and domestic activity’ and that ‘from a risk-management perspective, this argues for patience as the outlook becomes clearer’.
Away from the Fedspeak, yesterday’s economic dataflow was fairly quiet. In the US we saw the February labour market conditions index fall 1.6pts last month to a below market -2.4 (vs. +1.0 expected) which is in stark contrast to Friday’s employment report. In fact the reading was the lowest since June 2009 and the first back-to-back monthly drop since 2012. Post the closing bell we learned that US consumer credit in January rose by the least since May 2012 ($10.54bn vs. $17bn expected), with revolving credit (which includes credit cards) recording the first decline since February 2015. In Europe the main data of note was out of Germany where factory orders declined by less than expected in January (-0.1% mom vs. -0.3% expected). The Euro area Sentix investor confidence reading printed down 0.5pts this month at 5.5 and nearly 3pts below expectations.
Just before we look at the day ahead, a quick update on the migrant crisis talks in Brussels where a proposal is being debated between Turkey and the EU in which Turkey will accept the re-admission of migrants in exchange for further financial aid, visa-liberalisation for Turkish citizens and also a recommencing of EU accession talks. As per the BBC, the EU is demanding that Turkey take back migrants who fail to qualify for asylum and in return Turkey is demanding the EU to accept one Syrian refugee for every migrant taken back. Talks are set to resume ahead of the migration summit on 17th-18th March.
Looking at the day ahead, this morning in Europe we’ll be kicking off in Germany where the January industrial production data is due, shortly followed by French trade data. Later this morning we’ll receive the second reading on Q4 GDP for the Euro area (no change expected to the initial +0.3% qoq estimate) along with a breakdown of the components. The calendar is fairly thin again in the US this afternoon with last month’s NFIB small business optimism survey reading the only release of note. The BoE’s Carney and Cunliffe testifying to UK lawmakers (at 9.15am GMT) on Britain’s referendum on EU membership is worth keeping an eye on too.
via Zero Hedge http://ift.tt/21YXNnD Tyler Durden