Good news is still bad news after all.
After last night’s China 6.7% GDP print which while the lowest since Q1 2009, was in line with expectations, coupled with beats in IP, Fixed Asset Investment and Retail Sales (on the back of $1 trillion in total financing in Q1)…
… the sentiment this morning is that China has turned the corner (if only for the time being). And that’s the problem, because while China was a good excuse for the Fed to interrupt its rate hike cycle as the biggest “global” threat, that is no longer the case if China has indeed resumed growing. As such Yellen no longer has a ready excuse to delay. This is precisely why futures are lower as of this moment, because suddenly the “scapegoat” narrative has evaporated.
The other key event that will set the market tone today is this Sunday’s OPEC meeting in Doha. As a result, crude prices have softened for a third day in a row in the wake of comments that the Iranian Oil Minister will not attend the meeting (however the OPEC governor will be present). This will undoubtedly have potential ramifications for negotiations this weekend as Iran are seen as a key player in striking a deal given their resistance to such a deal. Therefore, the absence of the Iranian oil minister could be seen as a negative for what is already set to be a difficult weekend of discussions.
“The worst outcome for them would be if the meeting happened and some really negative sentiment came out of it – a producer, particularly Iran, came out and said the deal is not on the table,” Amrita Sen, chief oil analyst at consultants Energy Aspects Ltd., said in an interview with Bloomberg Television. “OPEC don’t want prices to go back down.”
Citi further soured the mood with a report that the Doha meeting is “is all about nothing, no matter what agreement might be forged,” and warns to expect a “sharp oil market sell-off” on Monday if there’s no accord, while a slower sell-off will occur if there’s a formal agreement with “no teeth.”
Elsewhere, European stocks little changed, with investors wary of potential disappointment from the talks. Europe halted a five-day advance. German bonds pared their first weekly drop in more than a month. South Korea’s won led gains in Asian currencies as a flood of Chinese data added to evidence that the world’s second-largest economy is stabilizing. Standard & Poor’s 500 Index futures slipped 0.2 percent, after equities ended little changed on Thursday amid gains in banks and declines in technology companies. Citigroup Inc. is scheduled to report quarterly earnings Friday.
In summary: the final session of the week sees the weekend’s Doha meeting take full focus as the energy complex guides price action through much of the morning. WTI and Brent both started the session at elevated level as many participants forecast some form of deal between OPEC and non OPEC nations in an attempt to freeze oil output and bring a halt to the 18 month slide in oil prices. However, after the Iranian oil minister stated he will not attend Doha discussions but the OPEC governor will be there, WTI and Brent futures fell from their best levels. Notable underperformance has been seen in the DAX led by financials and auto names, with the likes of Volkswagen reporting a fall in their brand sales. Separately, Bunds have seen upside today, trading above the 163.50 level, benefitting from the softness in equities, while also bolstered by EUR 36b1n of redemptions from Italy, Netherlands and France.
This is where markets stand now:
- S&P 500 futures down 0.2% to 2073
- Stoxx 600 down 0.3% to 343
- FTSE 100 down 0.4% to 6342
- DAX down 0.6% to 10037
- German 10Yr yield down 2bps to 0.15%
- Italian 10Yr yield down 1bp to 1.34%
- Spanish 10Yr yield down less than 1bp to 1.5%
- S&P GSCI Index down 0.8% to 337.1
- MSCI Asia Pacific down 0.2% to 132
- Nikkei 225 down 0.4% to 16848
- Hang Seng down 0.1% to 21316
- Shanghai Composite down 0.1% to 3078
- S&P/ASX 200 up 0.8% to 5157
- US 10-yr yield down 2bps to 1.77%
- Dollar Index up less than 0.01% to 94.91
- WTI Crude futures down 1.3% to $40.97
- Brent Futures down 0.9% to $43.44
- Gold spot up 0.1% to $1,230
- Silver spot up 0.3% to $16.21
Top Global News
- Oil Producers Head for Doha Counting $315b Cost of Slump: oil countries to debate on Sunday in Doha production freeze
- IMF Says Greek Debt Numbers Don’t Add Up as EU Defends Its Plan: Lagarde says country’s debt not sustainable; relief needed
- Spanish Industry Minister Soria Resigns Over Panama Leaks: Soria linked to offshore company set up by Mossack Fonseca
- Synaptics Said to Push for Deal With Chinese Suitor by End- April: Two sides still negotiating price of about $110-per- share
- Goldman’s Blankfein Said to Push Deepest Cost Cuts in Years: Push includes firings, travel limits; more measures possible
- Volkswagen Europe Quarterly Market Share Hits Five-Year Low: VW-brand sales fall amid efforts to resolve emissions rigging
- Credit Suisse Faces Penalty in Japan for Leaking Information: SESC says an analyst shared data on a company’s earnings
Looking at regional markets this morning, we first focus on Asia where stocks saw subdued trade following a flat lead from Wall St. and as participants digest the latest Chinese data releases which mostly surpassed estimates, although GDP printed in line. Nikkei 225 (-0.5%) opened significantly lower on profit-taking following yesterday’s +3% gain and over 1000 point rally in the past 3 days. However, the index then recovered off its worst levels as JPY extended on weakness amid increased hopes of BoJ action at this month’s meeting. Shanghai Comp (-0.2%) was negative despite Chinese industrial production, retail sales and lending/financing data all beating expectations, as GDP fell to a 7-year low as expected. 10yr JGBs saw marginal support amid the risk-averse sentiment in Japan alongside the BoJ in the market for around JPY 1.2trl of JGBs under its bond buying program.
Top Asia News:
- China’s Economy Stabilizes as Debt Surge Spurs Property Comeback: Credit surge raises question marks over growth sustainability
- Tencent Said in Talks for Syndicated Loan Up to $2 Billion: Separate from $2.45b facility worked out last year
- Infosys Sales Forecast Beats Estimates After Major Deal Wins: Sales projected to grow as much as 13.8% in USD
- Saudi Arabia Says Donation to Malaysian Premier Was Genuine: Money appeared in Najib’s accounts in 2013 before elections
- At Least 9 Killed, Hundreds Injured in Southern Japan Quake: No reports of damage to nearby operating nuclear reactors
In Europe, the Stoxx Europe 600 Index slipped 0.1 percent, paring its weekly advance to 3.5 percent. Auto-related shares fell the most on the Stoxx 600, with Volkswagen AG losing 1.1 percent after data from the European Automobile Manufacturers’ Association showed its share of the European market contracted to a five-year low. Anheuser-Busch InBev NV led food and beverage companies higher, rising 2 percent after agreeing to create a fund that will support the South African beer industry and protect jobs in the country to help seal approval for its proposed takeover of SABMiller Plc, which added 1.2 percent. Carrefour SA advanced 4.1 percent after France’s largest retailer reported higher first quarter revenue as growth in southern Europe and Latin America compensated for a decline in China.
Top European News:
- ING Sells $1.6b of NN Stock, Completing Exit From Insurer: bank will post net loss on deal of about 100 million euros
- STMicroelectronics Is Said to Seek Successor to CEO Bozotti: has struggled to generate consistent profit under Bozotti
- Rio Tinto CEO Says Iron Ore’s 55% Rally About to Fizzle Out: CEO Sam Walsh cites new production coming on later in 2016
- Rational Falls Most in 8 Mths as Baader-Helvea Downgrades Stock: cuts stock to sell from buy
- Carrefour Reports Higher Quarterly Sales, Buoyed by Brazil: analysts’ consensus for full-year profit is reasonable, CFO says
- AB InBev Pledges South African Fund to Smooth SABMiller Deal: Budweiser maker agrees to maintain employment levels
In FX, we have seen some cautious trading in early London, but much of the action seen in AUD and CAD this morning — the latter seeing some 2 way trade ahead of the much awaited Oil talks in Doha this weekend. There are growing expectation that there will be limited concrete progress towards production levels, so we are erring on the side of some near term CAD weakness. Sub 1.2800 bids coming in, but we are holding comfortably off the near 1.2900 highs seen yesterday. Against this we see the market intent on improving on the AUD highs seen yesterday. The spot rate hitting a .7736 high, and bids here firm from .7700 (in London) looking to a test of .7750 (good offers here). NZD/USD has followed higher, reclaiming .6900. GBP was having a quiet morning until a snap higher took Cable from 1.4130 lows to 1.4185/6. Little behind the move, as markets thin. EUR/USD also range bound, but well capped ahead of 1.1300.
In commodities, heading into the North American cross over, Crude prices have softened in the wake of comments that the Iranian Oil Minister will not attend the meeting in Doha this weekend (however the OPEC governor will be present). This will undoubtedly have potential ramifications for negotiations this weekend as Iran are seen as a key player in striking a deal given their resistance to such a deal. Therefore, the absence of the Iranian oil minister could be seen as a negative for what is already set to be a difficult weekend of discussions.
Overnight Gold prices saw uneventful trade and is on course for its first weekly decline in 3 weeks as the heightened risk sentiment earlier in the week dampened demand for the safe-haven. Elsewhere, copper and iron ore prices were subdued overnight following Chinese GDP data which fell to its lowest in 7 years, although copper prices are still on course for its best week in 1% months.
Copper, nickel and zinc declined in London, trimming their biggest weekly advances in more than a month. The metals all climbed more than 3 percent from a week ago. Iron ore futures in Dalian dropped the most this month after Rio Tinto Group, the world’s second-biggest producer, warned recent price gains aren’t sustainable. The steel-making raw material fell 2.2 percent on Friday, trimming this year’s advance to 27 percent. China, the world’s biggest steel producer, pushed output to a record in March, data showed Friday.
Investors will also look to economic releases on Friday, including industrial production and consumer sentiment — both of which are forecast to show improvements from the previous period — for indications of the health of the world’s biggest economy and the possible trajectory of interest rates.
Bulletin Headline Summary from RanSquawk and Bloomberg
- European equities remain unresponsive to the better than expected Chinese retail sales and industrial production.
- All eyes on the Doha meeting as energy guides price actions, following announcement that the Iranian Oil Minister will not attend.
- Looking ahead, highlights include US Empire manufacturing, industrial production and University of Michigan Sentiment as well as comments from ECB’s Costa and Fed’s Evans.
- Treasuries higher in overnight trading as week’s auction completed and global equity markets sell off along with WTI crude oil; major oil suppliers meet in Doha to discuss an output freeze.
- Nations representing almost 60 percent of the world’s oil production will gather in Doha on April 17 to discuss freezing their output at January levels in an effort to stabilize prices
- Goldman Sachs is embarking on its biggest cost-cutting push in years as it tries to weather a slump in trading and dealmaking, according to people with knowledge of the effort
- Chinese leaders appear to have stabilized their $10 trillion-plus economy by relying on a tried and true playbook: unleash a torrent of credit to power a borrowing surge and spending splurge; China may have $1.3 trillion loans extended to borrowers that don’t have sufficient income to cover interest payments, with potential losses equivalent to 7% of the country’s gross domestic product, according to the IMF
- On Sunday the bitter political drama that has all but paralyzed Brazil will take its climactic turn; the Chamber of Deputies vote that could put President Dilma Rousseff a hair’s breadth from impeachment
- The war of attrition over the next Spanish government took an unexpected twist on Friday when Acting Industry Minister Jose Manuel Soria resigned over his links to an offshore company listed in the Panama leaks
- The IMF raised doubts about Greece’s ability to keep up repayments under a plan being negotiated with its European creditors, who insisted they’ve already provided plenty of debt relief
- A year ago today, European equities hit their highest levels ever. But the euphoria about Mario Draghi’s stimulus program didn’t last, and trader skepticism is now rampant
- Since Mario Draghi announced plans to start acquiring corporate debt in Europe, the market’s biggest winners are bonds he won’t be buying
Sovereign 10Y bond yields mixed, Greece -24bp; European, Asian equity markets lower; U.S. equity-index futures drop. WTI crude oil and copper drop, precious metals rise
US Event Calendar
- 8:30am: Empire Manufacturing, April 1, est. 2% (prior 0.62)
- 9:15am: Industrial Production m/m, March, est. -0.1% (prior -0.5%)
- Capacity Utilization, March, est. 75.3% (prior 76.7%, revised 75.4%)
- Manufacturing (SIC) Production, March, est. 0.1% (prior 0.2%)
- 10:00am: U. of Mich. Sentiment, April P, est. 92 (prior 91)
- Current Conditions, April P (prior 105.6)
- Expectations, April P (prior 81.5)
- 1 Yr Inflation, April P (prior 2.7%)
- 5-10 Yr Inflation, April P (prior 2.7%)
- 4:00pm: Total Net TIC Flows, Feb. (prior $118.4b)
- Net Long-term TIC Flows, Feb. (prior -$12b)
Central Banks
- 12:30pm: Fed’s Evans speaks in Washington
DB’s Jim Reid completes the overnight wrap
this morning marks the start of the official UK EU referendum campaigning period. From now until the poll date on June 23rd strict rules apply on commenting or publishing non-campaign affiliated pieces. So one would expect a huge drop off in coverage of the issue from the financial world. So on this matter see you on June 24th.
Onto things we can discuss, regular readers will know that “helicopter money” has long been our expected end game to this post-GFC world. We’ve said in the recent past that we still think we’re in the early stages of money printing rather than the latter stages. It’s just that this printed money will likely eventually be directed in a different manner to what we’ve seen so far. Our expectations of this were laid out in our 2013 long-term study “A Nominal Problem”. Given this we wanted to highlight a piece George Saravelos’s team published last night entitled “Helicopters 101: Your guide to monetary financing”. It’s a great report and goes through the practicalities, historical experiences, legal constraints and potential market impacts. They conclude that monetary financing may be more likely than commonly assumed.
Before we go any further, we’re switching our focus straight over to China where the hotly anticipated Q1 GDP data has just been released. There was no unexpected surprises however after growth was reported at +6.7% yoy for the quarter (down from 6.8%) which is bang in line with market expectations and means the current rate is sitting in the middle of the Governments 6.5% to 7% target range for the year.
There’s been a raft of other data released from China too and it’s generally quite positive. Industrial production printed well above expectations in March (+6.8% yoy vs. +5.8% expected) which has resulted in the YTD YoY rate jumping four-tenths to +5.8%. Retail sales (+10.5% yoy vs. +10.4% expected) also beat, along with fixed asset investment (+10.7% ytd yoy vs. +10.4% expected) last month. New credit measures were also supportive. Aggregate financing of 2.3tn yuan exceeded estimates of 1.4tn yuan and is up from 780m yuan in February, while new loans (1.4tn yuan vs. 1.1tn yuan expected) also exceeded. The M2 measure of broad money supply rose one-tenth of a percent to 13.4% yoy.
Despite some green shoots in the data, markets are closing out the week a bit soft. In China the Shanghai Comp and CSI 300 are -0.37% and -0.29% (they were already down prior to the data) while elsewhere the Nikkei (-0.34%), Hang Seng (-0.18%) and Kospi (-0.15%) are also lower. Only the ASX (+0.34%) is trading firmer. Metals markets are little moved, although credit markets are a touch tighter in the Asia region.
Moving on. For the first time in some days and despite another decent session for risk in Europe with the Stoxx 600 (+0.27%) closing higher for the fifth day in a row, markets in the US were fairly directionless from the get go. The S&P 500 (+0.02%) was close to unchanged by the end of play despite another positive day for the banking sector. Bank of America reported quarterly revenues slightly below street expectations, although earnings pretty much matched expectations with much of that being attributed to a slashing of costs (much like JPM’s earlier this week) and also a boost from its retail arm. Wells Fargo actually beat at both the revenue and earnings line, although the focus was on the lifting of reserves against energy loan losses – a theme we’ve seen in the early reports for the sector with the FT stating that the three big US banks have so far added a combined $1.5bn of reserves in the quarter alone. Wells management also made mention to the fact that their energy portfolio remains under ‘significant stress’. Citigroup will cap off the results for the banks this week when they report this afternoon.
Earnings reports will intensify in the US next week so look out for this and also by Monday we’ll know the headlines from the oil producers meeting in Doha this weekend which should help to set the early tone for the open on Monday.
Outside of bank earnings yesterday’s inflation data out of the US was the other big focus for markets and investors. The numbers came in a touch lower than expected at both the headline (+0.1% mom vs. +0.2% expected) and core (+0.1% mom vs. +0.2% expected) which had the effect of knocking down the YoY rates for both to +0.9% and +2.2% respectively. Our US economists also point out that while that YoY core reading looks relatively robust, stripping out shelter from the series paints a different picture, with the twelve-month rate of the series down at +1.5% and suggestive that the strength in core inflation is not broad based.
Despite the inflation numbers coming in a touch below consensus, the data failed to stop Treasury yields moving higher with the benchmark 10y yield up close to 3bps and hovering around 1.793%. The US Dollar did stall slightly but still had a strongish day, while the latest initial jobless claims reading did little to dent that. Claims printed at 253k for last week, which was down 13k from the prior week and well below the street expectations of 270k. In fact that reading is the lowest since 1973 and it means claims have stayed below 300k for 14 months.
Staying with the US, over at the Fed the latest set of comments came out of the Atlanta Fed’s Lockhart. The Fed official noted a slight change of tune, opining that some recent softening in consumer spending and business investment data has impacted his thinking and as a result won’t be advocating a move in April. This came after Lockhart had previously said momentum in the data was positive enough to possibly justify a move this month. Lockhart reiterated however that June remains an option, although it’s worth highlighting that the probability of such as implied by futures markets is continuing to trend lower. We’re currently sitting at a just 16% probability of a 25bps hike, which is down from the low 20%’s a few weeks back.
There was inflation data out in Europe yesterday too. The final March print for the Euro area was revised up a tenth to 0.0% yoy, which was up from the -0.2% reading in February, while there was no change made to the core reading of +1.0% yoy. Meanwhile, yesterday’s MPC meeting in the UK saw no changes made to the BoE’s policy rate as expected with a unanimous 9-0 vote.
Turning over to the day ahead, this morning in Europe it’s a fairly quiet close to the week datawise with the only release of note the February trade balance reading for the Euro area. There’s some important data due out in the US this afternoon however, with the highlight likely to be the March IP report where current expectations are set at -0.1% mom. As well as this we’ll also get manufacturing data in the form of the manufacturing production report and the April empire manufacturing data. We’ll cap the day off with the preliminary reading for the University of Michigan consumer sentiment reading (expected at 92.0, up from 91.0 in March). Away from the data, the Fed’s Evans is due to speak this evening (at 5.50pm BST) while today will also see the IMF and World Bank spring meetings kick off, and continue over the weekend.
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What you may not know is that Realtor.com (or, more specifically, the parent company called Move) is suing Zillow and two former executives for nearly two billion bucks