Futures Tread Record Territory Water Following Overnight China, Ukraine Fireworks

Futures Tread Record Territory Water Following Overnight China, Ukraine Fireworks

In addition to the already noted fireworks out of China, where the Yuan saw the biggest daily plunge since 2008 and the ongoing and very rapid newsflow out of the Ukraine, focus this morning was very much of the latest Eurozone CPI data, which despite matching previous low levels, came in above expectations and in turn resulted in an aggressive unwind of short-EUR bets as market participants were forced to re-asses the likelihood of more easing by the ECB. Still, even though the Euribor curve bear steepened and Bunds came under significant selling pressure, the EONIA forward curve remained inverted, signifying that there is still a degree of apprehension over what is unarguably very low inflation data.

Looking elsewhere, even though the PBOC engineered correction resulted in the Chinese CNY posting record loss this week, the Shanghai Comp settled the session in the green, as the initial volatility surrounding the exodus of carry trades gradually abates. In Europe this morning, stocks are seen lower across the board, with healthcare and financials underperforming.

Going forward, market participants will get to digest the release of the latest GDP data from Canada and the US, as well as Chicago PMI and Pending Home Sales data.

Bulletin headline summary from Bloomberg and RanSquawk

  • EUR strengthened across the board and the Euribor curve bear steepened following the release of higher than expected Eurozone CPI data.
  • Even though the PBOC engineered correction resulted in the Chinese CNY posting record loss this week, the Shanghai Comp settled the session in the green, as the initial volatility surrounding the exodus of carry trades gradually abates.
  • Crisis in Ukraine continues to escalate, after Ukraine’s interior minister accused Russian naval forces of occupying Sevastopol airport in the autonomous region of Crimea.
  • Treasury 10Y notes headed for best weekly gain in a month as ongoing unrest in Ukraine and poor U.S. economic data drove strong bidding at 2Y/5Y/7Y auctions.
  • USTs also benefited from rally in JPY and expectations that today’s month-end index extension (0.13yr est. for Barclays Treasury Index, biggest since Aug. 2011), will drive demand
  • The euro-area inflation rate exceeded economists’ forecasts in February, easing pressure on the ECB to take action next week to foster the fragile economic recovery
  • Ukraine’s new government on its first day in office invited the IMF to Kiev for talks about a bailout worth as much as $15b while deposed former President Viktor Yanukovych, who claims to be the country’s rightful leader, surfaced in Russia and will hold a news conference today
  • Armed troops wearing uniforms without insignia arrived at Crimea’s main airport in Simferopol while servicemen from Russia’s Black Sea Fleet blocked Sevastopol’s Belbek airport, acting Interior Minister Arsen Avakov said on his Facebook account; the fleet said it wasn’t involved in the incident
  • China’s yuan tumbled by the most on record on speculation the central bank will widen the currency’s trading band, allowing greater volatility at a time when growth is slowing in the world’s second-largest economy
  • Several thousand anti-government demonstrators marched in Caracas yesterday after Maduro tried to defuse two weeks of protests by granting Venezuelans an  unexpected six-day holiday
  • The London gold fix may have been manipulated for a decade by the banks setting it, researchers say
  • Goldman Sachs, which generated 46% of revenue from sales and trading last year, recorded losses from that business on 27 days in 2013, up from 16 the previous year
  • Sovereign yields mostly lower. EU peripheral spreads steady. Nikkei -0.6%; Shanghai Composite gains 0.4%. European stocks and U.S. stock-index futures decline. WTI crude, gold and copper little changed

US event calendar:

  • 8:30am: Revised GDP q/q, 4Q, est. 2.5% (prior 3.2%)
    • Personal Consumption, 4Q, est. 2.9% (prior 3.3%)
    • GDP Price Index, 4Q, est. 1.3% (prior 1.3%)
    • Core PCE q/q, 4Q, est. 1.1% (prior 1.1%)
  • 9:45am: Chicago Purchasing Managers, Feb., est. 56.4 (prior 59.6)
  • 9:55am: UofMich. Confidence, Feb. final, est. 81.2 (prior 81.2)
  • 10:00am: Pending Home Sales m/m, Jan., est. 1.8% (prior -8.7%)
  • Pending Home Sales y/y, Jan., est. -10.8% (prior -6.1%)
  • 11:00am: POMO- Fed to purchase $1b-$1.25b in 2036-2044 sector

Asian Headlines

Despite the fact that the Chinese CNY posted weekly record loss this week, with money market rates also edging higher, the initial volatility which was observed in equity markets has abated amid spec. that the PBOC is engineering a temporary correction. As a result, while the CNY carry trade squeeze continued to support flows into JPY, with consequent move lower by the Nikkei 225 index, the Shanghai Comp was able to settle session in minor positive territory.

Japan’s GPIF’s weighting in Japanese equities at 16.6% at end-Dec, nearing allocation ceiling of 18% and domestic bonds at 53.40%, nearing allocation floor of 52%. Japan’s GPIF public pension fund shows investment gain for record 6th consecutive quarter in Oct-Dec. (RTRS)

Japanese National CPI (Jan) Y/Y 1.4% vs. Exp. 1.3% (Prev. 1.6%)

Japanese Industrial Production (Jan P) M/M 4.0% vs. Exp. 2.8% (Prev. 0.9%) – The headline figure posted its fastest monthly gain since June 2011.

EU & UK Headlines

Eurozone CPI Estimate (Feb) Y/Y 0.8% vs. Exp. 0.7% (Prev. 0.8%) – Which immediately resulted in steepening of the Euribor curve and EUR supportive flows across the board as bets of further easing by the ECB were unwound.

Norway’s oil fund says sharply increased US, German, British government bond holdings in Q4 (the fund held 37.3% of bonds at end 2013 vs. 35.5% at end Q3). The fund also held 61.7% of portfolio in equities at end of 2013 vs.63.6% at end of Q3. 2013 return was second best in its history, highest since 2009. (RTRS)

Der Spiegel writes citing sources that publicly traded banks may not have to immediately disclose capital shortfalls identified by ECB in its Asset Quality Review (AQR).

Barclays preliminary pan-Euro agg month-end extensions: (+0.07y) (12m avg. +0.07y)

Barclays preliminary Sterling month-end extensions:(+0.05y) (12m avg. +0.06y)

US Headlines

Fed’s Fisher said that as soon as feasible, the Fed should stop asset purchases entirely. He also said that he was pleased with the decision to taper. (RTRS)

Barclays preliminary US Tsys month-end extensions:(+0.12y) (12m avg. +0.07y) – Large extension is a result of the refunding auctions earlier this month.


Financials underperformed in Europe this morning, with Erste Group Bank trading sharply lower after the bank posted less than impressive earnings and also noted that it has EUR 435mln exposure to Ukraine, despite also noting that it is not particularly concerned about it. At the same time, Spanish listed Bankia bank shares also came under selling pressure after the Spanish government started selling some of its stake in nationalised lender.


The release of higher than expected Eurozone CPI data, which in turn buoyed demand for the joint-bloc currency and pushed EUR/USD to its highest level since late December. At the same time, consequent USD weakness supported GBP/USD, which remained in the green despite the aggressive bid by EUR/GBP. Looking elsewhere, even though spot JPY rate recovered following the sell-off overnight amid yet another move higher by USD/CNY rate, implied vols remain better bid as the pain trade continues.

Crisis in Ukraine continues to escalate, after Ukraine’s interior minister accused Russian naval forces of occupying Sevastopol airport in the autonomous region of Crimea. The other main Crimean airport, Simferopol, has also been occupied by armed men. The men are thought to be pro-Russia militia. (BBC)


CME lowered initial margins for crude oil future NYMEX initial margins for specs by 8.8% to USD 3,410 per contract from USD 3,740 per contract. (BBG)

More winter storms are predicted for next week, with snow sleet and rain expected through out the US north east. (BBG)

China added 1.084bln tonnes to its oil reserves last year, with NatGas proven reserves increasing by 616.4bln cubic meters. (China News Service)

India gold imports may total 22 tons in February, according to India Gems & Jewellery Trade Federation. (BBG)

Freeport may be forced to declare force majeure at its Grasberg mine in Indonesia after the new concentrate ore rules in effect there. (BBG)

* * *

We conclude with the traditional Jim Reid overnight recap

We’ll review Yellen’s testimony in more detail below, but first we’ll take a quick look at overnight markets where the focus is again on China and the renminbi. As we type this morning, the CNH and CNY have declined by 0.4% and 0.6% respectively against the USD. At one stage the CNY was around 0.85% weaker on the day and pushing up against the top end of the PBOC’s daily trading band. Though the quantum of these falls doesn’t sound large, they are the largest oneday declines since 2008 according to Bloomberg data. Some are wondering whether the PBoC will step in to stabilise the yuan, but reports (Financial Times) have been suggesting that the central bank is indeed trying to shake out speculators who have put on the renminbi carry trade. Indeed, the USDCNH rate (6.13) is approaching the 6.20 mark, which is reportedly a key technical level for many SME and retail investors who have entered into leveraged CNH-appreciation option structures known as Target Redemption Forwards or TRFs (WSJ and Financial Times). All this follows a sharp devaluation in the CNH and CNY over the last fortnight, including a five-day window where it recorded its sharpest decline since the currency’s devaluation in 1994 (Financial Times). The moves come ahead of China’s National People’s Congress starting next week where economic and market reforms will again be discussed by China’s leaders (Reuters).

Asian equity markets are trading with a downbeat tone partly in reaction to the continued renminbi depreciation, with losses on the Hang Seng (-0.3%), Nikkei (-1.0%) and KOSPI (-0.2%). Chinese equities are underperforming headlined by the HSCEI (-0.8%) and Shanghai Composite (-0.95%). There have also been falls in the AUDUSD (-0.1%), copper futures (-0.4%), and in USDJPY (-0.5%) in sympathy with the move in the renminbi. Note that copper futures have declined for eight days straight, with Chinese import iron ore following a similar pattern. Elsewhere in Asia, the latest Japanese CPI numbers for February were broadly in line with market expectation. The headline reading of +1.4% YoY was marginally higher than the 1.3% expected, but slower than the 1.6% YoY recorded in January. Core CPI rose 0.7% YoY which was in line with consensus estimates and the prior month’s result.

Looking at Yellen’s speech in more detail, perhaps the key highlight was Yellen’s commentary relating to the recent run of disappointing US data. On this she mentioned that “part of that softness may reflect adverse weather conditions, but at this point it’s difficult to discern exactly how much. In the weeks and months ahead, my colleagues and I will be attentive to signals that indicate whether the recovery is progressing in line with our earlier expectations”. On rate thresholds, Yellen hinted that the Fed was moving away from quantitative guidance saying the Fed will look beyond the 6.5% unemployment threshold to decide more broadly whether the labor market was healthy enough for tightening. Consistent with other Fed speakers of late, Yellen said it would take a “significant change” in the outlook for the Fed to pull back from its gradual reduction in monthly asset purchases. There were also comments on assets bubbles and financial stability, but on these topics Yellen’s comments were fairly similar to those she made before the House Committee on February 11th. US 10yr yields were rangebound between 2.63% and 2.66% yesterday, closing at a three-week low of 2.63% (or -3bp).

Taking a closer look at yesterday’s market moves, there was firmer sentiment in EM in particular in LATAM where we saw solid gains in equities including in Brazil (+2.1%) and Mexico (+0.8%). The CDX EM credit index (+0.25pt in price) managed to recover most of the Ukraine/Turkey-inspired losses on Wednesday but there was still some nervousness about political and ethnic tensions in Ukraine. Indeed, before Yellen’s testimony markets were weighed by reports that an unnamed, armed group had taken control of the local Crimean parliament in the Ukraine. There are also unconfirmed reports this morning that dozens of armed men in military uniforms have seized an airport in the capital of Ukraine’s Crimea region (AP). The report said the men with “Russian Navy ensigns” first surrounded the Simferopol Airport’s domestic flights terminal. On a more positive note, Ukrainian Prime Minister Arseniy Yatsenyuk’s government on its first day in office invited the IMF to Kiev for talks about securing funds of up to $15 billion. Meanwhile former President Viktor Yanukovych, who claims to be the country’s rightful leader, surfaced in Russia and will hold a news conference today, according to Bloomberg.

In terms of data flow, the main highlight was the better than expected US durable goods report. US January durable goods orders declined 1.0% on the headline (-1.7% consensus) but rose in the core orders category by +1.7% (vs -0.2% expected). Initial jobless claims for the week ending February 22 (one week after the February employment survey period) rose 14k to 348k (335k expected). In terms of earnings, RBS stock fell 7.74% after the company reported FY13 earnings. The UK Telegraph noted that the bank’s cumulative losses since its bailout has now drawn level with the GBP46bn equity pumped into it by the government in 2008. Elsewhere in the European banking sector, Bloomberg is reporting that the Austrian finance ministry is seeking ways to force holders of Hypo Aple-Adria-Bank debt, guaranteed by the province of Carinthia, to accept losses (Bloomberg). The bank is facing mounting losses and two-thirds of Austrians say the government “should walk away” according to a Gallup poll. Bloomberg is describing this as an interesting test case given that the bonds in question are guaranteed obligations of a 100% government owned bank.

Looking at the day ahead, we have a number of data releases including the Euroarea CPI estimate for February which is a key datapoint ahead of the March ECB meeting. The market is expecting a print of around 0.7% YoY, although a couple of the more recent analyst estimates have come in below that, possibly due to yesterday’s below-expectation German CPI reading. In Europe, we also get German retail sales (+1.0% MoM consensus) and Euroarea unemployment. Across the Atlantic, the highlights are the second estimate of US Q4 GDP, the Chicago PMI, UofM confidence and pending home sales. Canada will also report Q4 GDP and there are central bank speakers from the BoE (Carney) and Fed (Fisher). On Saturday, China will release its official February manufacturing PMI (consensus is 50.0 which would be a sixteen month low). Also over the weekend, Berkshire Hathaway will release its Q4 earnings and many are tipping the conglomerate will announce a record FY13 profit. There will also be plenty of focus on CEO Warren Buffet’s annual letter to shareholders which is scheduled to be released at the same time.

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