It was another day of ugly overnight macro data, all of it ouf of China, with industrial production (8.6%, Exp. 9.5%, Last 9.7%), retail sales (11.8%, Exp. 13.5%, Last 13.1%) and fixed asset investment (17.9% YTD vs 19.4% expected) all missing badly and confirming that in a world of deleveraging, the Chinese economy will continue to sputter. Which is precisely what the “bad news is good news” algos needs and why futures levitated overnight: only this time instead of latching on to the USDJPY correlation pair, it was the AUDJPY which surged after Australia – that Chinese economic derivative – posted its third best monthly full-time jobs surge in history! One can be certain that won’t last. But for now it has served its purpose and futures are once again green. How much longer will the disconnect between deteriorating global macro conditions and rising global markets continue, nobody knows, but sooner rather than later the central planner punch bowl will be pulled and the moment of price discovery truth will come. It will be a doozy.
In Europe, stocks traded mixed this morning, with the FTSE-100 index underperforming its peers following the release of less than impressive earnings by Morrisons, shares down around 10%. As a result, heading into the North American cross over, consumer services sector is among the worst performing, while the recovery by base metals also ensured that basic materials related stocks traded higher. Still, the move higher was led by financials, with Commerzbank trading with good gains following an upgrade by SocGen to buy rating.
Looking elsewhere, in spite of the bounce back by stocks this morning, USD/JPY traded lower, with Swiss rates also bid, as market participants remained vary of any future shocks stemming from China amid fears of more corporate defaults. On that note, Chinese Premier Li said that China is to take measures to regulate local financing vehicles and ensure no systemic financial risks arise from defaults. Of note, Ireland made a successful return to markets, selling its first 10y bond since entering the bailout in 2010.
Going forward, market participants will get to digest the release of the latest weekly jobs and retail sales reports from the US, while the US Treasury will auction off USD 13bln in 30y bonds.
Bulletin headline summary from Bloomberg and RanSquawk
- FTSE-100 index underperformed its peers following the release of less than impressive earnings by Morrisons, down 10% at the open.
- Chinese Premier Li said that China is to take measures to regulate local financing vehicles and ensure no systemic financial risks arise from defaults.
- Bundesbank’s Weidmann said that it is premature to declare euro zone debt crisis over, adding that ECB’s expansionary monetary policy stance is appropriate.
- Treasuries steady before week’s auctions conclude with $13b 30Y bonds, WI yield 3.675% vs 3.69% at February sale; retail sales due at 8:30am ET, est. +0.2%
- Yesterday’s $21b 10Y reopening was awarded at 2.729%, about 1.5bps below WI yield at 1pm according to Stone & McCarthy
- Other metrics strong, including highest bid-to-cover and lowest primary dealer award lowest since March 2013, as increase in direct award offset drop in indirects
- China’s industrial-output, investment and retail-sales growth cooled more than estimated in January and February, signaling an economic slowdown that makes the government’s 2014 expansion target harder to reach
- Chinese Premier Li Keqiang said there’s some flexibility around the nation’s target of 7.5% growth this year without specifying how much of a slowdown leaders would tolerate
- Russian government officials and businessmen are bracing for sanctions resembling those applied to Iran after what they see as the inevitable annexation of Ukraine’s Crimea region, according to four people with knowledge of the preparations
- Australia boosted payrolls in February by the most in more than 22 years, with the number of people employed full time rising by 80,500; overall employment climbed 47,300 vs 15k median estimate
- New Zealand raised its key interest rate, the first developed nation to exit record-low borrowing costs this year, and said it plans to remove stimulus faster than previously forecast to contain inflation
- The missing Malaysian airliner kept flying after it dropped off controllers’ radar screens, raising new questions about whether foul play was involved, according to people familiar with data gathered in the inquiry
- Sovereign yields mostly lower. EU peripheral spreads little changed. Asian equities mixed; Nikkei and Topix lower, Shanghai +1%. European equity markets, U.S. stock-index futures gain. WTI crude and copper lower, gold gains
US Event Calendar
- 8:30am: Retail Sales Advance, Feb., est. 0.2% (prior -0.4%); Retail Sales Ex Auto, Feb., est. 0.1% (prior 0.0%); Retail Sales Ex Auto and Gas, Feb., est. 0.2% (prior -0.2%)
- Retail Sales Control Group, Feb., est. 0.2% (prior -0.3%)
- 8:30am: Initial Jobless Claims, March 8, est. 330k (prior 323k)
- Continuing Claims, March 1, est. 2.903m (prior 2.907m)
- 8:30am: Import Price Index, Feb., est. 0.5% (prior 0.1%)
- 9:45am: Bloomberg Consumer Comfort, March 9
- 10:00am: Business Inventories, Jan., est. 0.4% (prior 0.5%)
- 2:00pm: Monthly Budget Statement, Feb., est. -$195b (prior – $203.5b)
- 11:00am: Fed to purchase $3.25b-$4b in 2018 sector
Chinese Premier Li said that China is to take measures to regulate local financing vehicles and ensure no systemic financial risks arise from defaults. (BBG)
– At the same time, Moody’s said that non-financial companies in China will see little effect from the Chaori Solar default as their exposure to any follow-on tightening is limited.
– This follows the first corporate bond default in China’s history last Friday, with markets keenly focused on what could be the next domino to fall.
Of note, JGBs closed sharply lower and had a brief moment of extreme volatility as it spiked to the downside by 1 point but then immediately pared the large majority of the move, which was attributed to a rogue algorithmic trade and a sharp reaction to the Bank of Japan’s decision to buy JPY 170bln of long-term bonds vs. Exp. JPY 180bln. In terms of Chinese data released overnight:
– Chinese Industrial Production YTD (Feb) Y/Y 8.6% vs. Exp. 9.5% (Prev. 9.7%) – Retail Sales YTD (Feb) Y/Y 11.8% vs. Exp. 13.5% (Prev. 13.1%)
EU & UK Headlines
Bundesbank’s Weidmann said that it is premature to declare euro zone debt crisis over, adding that ECB’s expansionary monetary policy stance is appropriate. Also, even though Bundesbank’s Weidmann said that the risk of widespread deflation in the Eurozone is very limited, EU inflation indicators (ie swap rates) continued to point to growing fears of lower inflation for a prolonged period of time, with 2y inflation swap rate falling to its lowest since late 2008.
This morning, Italy sold EUR 7.75bln vs. Exp. EUR 7.75bln worth of BTPs, while the Irish debt agency successful returned to markets with its first 10yr auction since entering the bailout in 2010.
Congress will fail to approve an aid package to Ukraine before a Sunday referendum in Crimea, where voters will decide whether to break away from Kiev’s government to join Vladimir Putin’s Russia. (TheHill) While a Senate panel on Wednesday approved legislation in a bipartisan vote, aides said differences between the House and Senate will prevent Congress from completing its work before lawmakers leave Washington on Friday for a weeklong recess.
Consumer services sector underperformed since the open, following earnings by Morrison’s, which consequently weighed on other retailers such as Tesco and Sainsbury’s. At the same time, with stocks trading higher enabled credit spreads to reverse some of the recent widening, which when combined with a positive broker recommendation by SocGen meant that financials outperformed on the sector breakdown.
Resumption of the downward trend by USD/CNY following the conclusion of the annual congress meeting in China, together with the pick up in sentiment saw the USD index fall to its lowest level since late October 2011. In turn, EUR/ USD advanced to its highest level since September 2011, in spite of the fact that there remains a growing risk of deflation in the joint currency bloc.
AUD benefited from a rebound by gold prices and also the release of better than expected jobs report which also saw the pair move above its 100DMA line. Also of note, RBNZ hiked their Official Cash Rate by 25bps to 2.75% as expected, adding that NZD remains a headwind and that the current exchange rate is not sustainable in the long-run.
Credit Suisse says platinum selling at USD 1,550/oz is possible on continuation of strikes in South Africa. (BBG)
Peruvian silver mine Uchucchacua owned by Bueaventura has been hit by a miners strike. The Union leader said it was based on the dismissal of 10 employees and the need for better working conditions that has halted production.
Estimated output loss is 324,000 kilos of silver. (RTRS)
The decision to release 5mln bbls of crude from the US Special Petroleum Reserve is a ‘warning shot’ to Russia saying the decision has been engineered as a warning shot to Russia over the Ukrainian crisis, with the US excuse of ‘testing operations’ as too close to coincidence, according to analysts at SocGen. (BBG)
Arab countries will extend aid to Egypt in the form of petroleum products until at least September, according to Egyptian Finance Minister Dimian. (RTRS)
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We conclude with the traditional overnight recap by DB’s Jim Reid
As we went to print this morning China printed its retail sales, industrial production and fixed asset investment data for February. Overall the data is disappointing, which doesn’t help the general nervousness over the Chinese growth story at the moment, but again we need to be wary of seasonal factors. For the record China’s February industrial production (8.6% YTD YoY vs 9.5% expected), retail sales (11.8% YTD YOY vs 13.5% expected) and fixed asset investment (17.9% YTD YoY vs 19.4% expected) were all below consensus. In reaction, S&P500 futures are down about 1pt as we type and the AUD is down 20 ticks. Earlier this morning we saw better sentiment return to Asian markets but volumes were generally on the low side. In China, Premier Li spoke to reporters to mark the end of the National People’s Congress. Li said that he was aware of the downside risks to the Chinese economy but assured that the government will take measures to ensure growth was within a reasonable range, to secure jobs and to prevent inflation. Amid all the concern about corporate and trust defaults, Li indicated that though he did not want to see defaults of financial products, some defaults cannot be avoided. He also stated that the government must ensure that there is no systemic financial risk arising from debt market problems. The words have helped the closely-watched Shanghai Composite (+1.2%) lead the rest of the region’s bourses higher overnight but it’s safe to say that sentiment remains pretty fragile. Adding to the jumpiness in Asia is a potential “fat finger” incident in the JGB futures market overnight, which saw the 10yr contract collapse by more than 1pt in a matter of seconds before swiftly recovering most of those losses.
Nevertheless, confidence there has been weakened today and 10yr JGB yields are up 1.5bp. In Australia, the AUDUSD (+0.9%) spiked higher following a significantly stronger than expected employment report (+47k vs 15k expected).
A surprising turnaround in sentiment during the NY session helped the S&P 500 (+0.03%) record a small gain yesterday and in the process avoid its first 3- day-consecutive fall in nearly two months. The catalyst for the NY morning rally was unclear but it might have been a combination of a rally in copper futures (both in London and Shanghai) and news that US Secretary of State John Kerry will be meeting with Russian Foreign Minister Sergey Lavrov in London on Friday to discuss the Ukraine crisis. Some dovish prepared remarks from the Fed nominees Fischer, Brainard and Powell ahead of their Senate nomination hearings today perhaps also helped.
Aside from the headlines on the Kerry-Lavrov London meet up, yesterday’s EM news flow was hardly confidence-inspiring. The MSCI EM equity index closed down -1.2% and the CDX EM credit index (-0.25points) notched up its fourth straight loss but those losses could have been larger were it not for the abrupt risk turnaround during the NY session. Reports of anti-government unrest in Turkey intensified yesterday and the BBC said that there were violent protests in at least 32 towns and cities across the country that were partly triggered by the funeral of a youth who had tragically passed away earlier in the week (BBC). Turkish bond yields spiked another 10bp, but still fared better than Russian 10yr USD bonds which sold off more than 20bp in yield terms yesterday. US and European lawmakers appeared to be inching slowly towards imposing sanctions against Russia, and the G7 issued a statement to the effect of condemning Russia’s actions in Crimea. The G7 also announced that the group has cancelled preparations for the next G8 summit in Sochi. Russian president Putin was said to have told his finance minister and central bank governor that he was dissatisfied with Russia’s economic growth rate (Reuters), but there was very little other detail provided on the discussions.
There were a few bright spots in EM, such as in India where there was better dataflow in the form of industrial production (January +0.1% vs -0.9% expected) and CPI (8.1% vs 8.3% consensus) but even that failed to inspire the INR (-0.44% against the USD).
Though we saw the S&P500 recover back to unchanged on the day and US treasuries close 4bp lower, there was surprisingly little macro data from the US to drive markets. Perhaps the biggest news was the release of prepared statements from the trio of Fed Board of Governor nominees. Of those, the most closely watched were the comments from the Fed vice-chair nominee Stanley Fischer who was on balance fairly dovish. He said that the Fed needed to remain very accommodative as “normalcy has not been restored”. He was referring to the unemployment rate which he thought was still too high and inflation which was below target. Interestingly, there was fair amount of commentary from Fischer on the Fed’s financial regulation role, saying that the financial crisis had driven home the lesson that the Fed also has to contribute its part to financial system stability. Staying on the Fed, the WSJ’s Hilsenrath wrote in a blog that the Fed’s rate guidance is likely to change, possibly at the next policy meeting on March 18th-19th with a shift away from unemployment-oriented guidance. He writes that Yellen’s next challenge is to rewrite guidance without unanchoring market expectations. Yesterday saw the front end of the UST curve underperform, with 2yr yields largely unchanged despite the rally in 10yr and 30yr.
Returning to the topic of Ukraine, our EM strategists write that the crisis there is still at a dangerous stage and the economic element to the crisis has yet to be resolved. Ukrainian FX reserves are now more or less exhausted and exchange controls have therefore been tightened to prevent a freefall in the currency. This has bought a little time but is not a sustainable solution in their view. They estimate that about US$35bn of external financial assistance is needed. Public debt is moderate at 40% of GDP but will inevitably increase significantly. This is partly because about 60% of government debt is denominated in foreign currencies. Against this backdrop, they consider whether there is a case for bailing in the private sector and suggest an alternative approach to private sector involvement which could involve the voluntary exchange of short-dated for longer-dated bonds. The nature of the situation in Ukraine (a relatively low debt stock, but considerable short-term uncertainty) make for ideal conditions for a “PSI-lite” approach such as this, which could be beneficial for Ukraine and for investors.
Turning to the day ahead, the focus will be on US retail sales and the Senate nomination hearing for Stanley Fischer (mainly the Q&A given that the prepared remarks have already been published). The Senate committee will also consider the nomination of Lael Brainard and renomination of Jerome Powell to a new term at the Fed. US weekly initial jobless claims, French and Italian CPI are the other major data points today.