Risk Off

Risk Off

With so much of the recent bad news roundly ignored or simply “priced in” and blamed on the snow, it is unknown just what it is that catalyzed the overnight round of risk-offness, but whatever the ultimate factor, it first dragged the Nikkei lower by 1.8%, as we noted previously, then sent the SHCOMP down by 0.55%, then ultimately dragged the USDJPY below the key 102 support area which in turn pulled US equity futures to set the scene for a red open (with no POMO and no Yellen testimony today which also was canceled due to snow), and, putting it all together, suddenly Europe too is back on the scene, with a blow out in Italian yields driven by the realization that the Letta government is on the edge of collapse, in a deja vu moment to those hot summers of 2011 and 2012.

Granted, the yield on the Italian 10 Year has about 3-4% higher to go before the full sense of imminent European doom returns, but it all starts with minor momentum inversions, and considering that the OMT is no longer a credible backstop as Deutsche explained yesterday following its official exposure as an emperor without clothes by the GCC, all the world needs now is for the European crisis to return full bore, just as Japan is scrambling to justify the failure of Abenomics, the EMs are on the edge of another risk off implosion, China is tapering (at least on the surface), and shadow bank blows up are just around the corner to make it all really exciting, and finally geopolitical is just around the corner.

Turning to the day ahead, with the second round of Yellen’s
Congressional testimony postponed due to the weather, the focus will be
on US retail sales data for the month of December. Consensus
expectations are for retail sales be flat MoM, and only slightly better
(+0.1% MoM) on an ex-auto as well as ex-auto & gas basis. The other
notable data releases today are US initial jobless. Following
yesterday’s Chinese trade numbers, it worth watching Rio Tinto’s FY13
results for any further clues or commentary about Chinese commodity
demand. Earnings updates from PepsiCo, Lloyds and BNP Paribas are also on today’s horizon.

Headline bulletin from RanSquawk and Bloomberg

  • Disappointing financial earnings and post-rally profit-taking sees European equities lower.
  • ECB forecasters sees growth risks tilted to the downside and have lowered their inflation forecasts.
  • EUR sees notable outperformance after breaking through 1.3650, the 50 DMA at 1.3655 and talk of Asian offers at 1.3640.
  • Looking ahead for the session, participants will get the chance to digest the release of US Retail Sales, Weekly Jobless data, US 30yr TIPS announcement and USD 16bln 30y bond auction.

Market Re-Cap

Less than impressive financial earnings and profit-taking from the recent rally has seen European equities trade lower across the board throughout the session. Notable underperformers are BNP Paribas (-3.83%) and Lloyds Banking Group (-4.74%) who are leading the way lower for the financial sector. With the FTSE 100 under heavy selling pressure following Rolls-Royce (-14%) and Tate & Lyle (-16%) less than impressive earnings reports.

The ECB monthly report revealed that forecasters see growth risks tilted to the downside. This initially prompted some weakness in EUR. However, EUR/USD soared approximately 20 minutes later by just under 50 pips after breaking through resistance at 1.3650 and the 50DMA at 1.3655 as well as being subject to Asian offers at 1.3640.

In fixed income markets, bunds are seen better bid following the move lower in equities, political instability in Italy and the ECB forecasts which revealed the bank sees 2014 HICP inflation at 1.1% from prev. forecast of 1.5%. Elsewhere, the Short-Sterling curve is seen flatter this morning as participants take profits from yesterday’s
aggressive QIR inspired steepening.

Asian Headlines

China are said to target a slower pace of exports this year, with 7.5% export growth in 2014. (BBG) This is despite exports rising 10.6% Y/Y in January, indicating the Chinese authorities expect a slowdown in international trade.

EU & UK Headlines

ECB forecasters sees growth risks tilted to the downside, bulletin echoes Feb. 6 policy statement by Draghi

– Sees inflation risks broadly balanced for 2014, 2015, somewhat to downside for 2016.
– Sees Eurozone 2016 GDP growth 1.7%, longer-term 1.8% (1.7% in Q4).
– Eurozone 2014 GDP growth 1.0% (1.0% in Q4), 2015 GDP growth 1.5% (1.5% in Q4).
– Eurozone 2016 HICP inflation seen at 1.7%, longer-term inflation seen at 1.9% (1.9% in Q4).
– Eurozone 2015 HICP inflation 1.4% (1.6% in Q4).
– Eurozone 2014 HICP inflation 1.1% (1.5% in Q4 forecast).

ECB’s Coene said a drop in CPI is not sufficient to force ECB action and that they need more information to see whether to cut rate. (DJN)

Italian government coalition partner Alfano says he will continue to support PM Letta if he has backing of his party and if centre-left withdraws backing from Letta it must explain its reasons openly. Alfano went on to say will evaluate whether to continue in government with centre-left leader Renzi if PM Letta loses support of his party. (RTRS)

BoE’s Dale said does not know what will happen in rates, but economic profile looks good in 2015 and that market pricing for 2015 rate rise looks reasonable. (BBG/BBC) Following yesterday’s inflation report, SocGen now expect the BoE to raise the key rate in Q1 2015 from previously forecast Q3 2015. (BBG)


Financials underperformed since the get-go in Europe, following less than impressive earnings by BNP Paribas and Lloyds. Also, Austrian listed Raiffeisen Bank came under heavy selling pressure amid renewed concerns over Hungary, with EUR/HUF bid as market participants continued to fret over potential rise in loan losses after an adviser to the EU’s top court said that Hungary’s courts can force banks to replace unfair contract terms for customers holding approx. USD 15bln of foreign-currency loans. In terms of other notable movers, Rolls-Royce shares fell over 10% after the company said that in 2014 it expects a pause in revenue and profit growth, reflecting offsetting trends.


USD/JPY and EUR/CHF traded lower this morning, amid general risk averse sentiment, with option related flow linked to tomorrow’s large expiries in USD/JPY at 101.50/102.50 also said to have contributed to the downward bias. Looking elsewhere, EUR/HUF surged this morning after Hungarian Central Bank monetary policy director Palotai said council is to evaluate HUF exchange rate at next rate meeting. Of note, analysts at Barclays noted yesterday that the weak HUF is likely to lead the National Bank of Hungary (MNB) to suspend its easing cycle after a small final interest rate cut this month.


Goldman Sachs see downside for gold prices in 2014 due to US growth rebounding, forecasting a USD 1,050/oz price by the end of 2014. (BBG)

IEA raises 2014 global oil demand forecasts on developed nations, with demand to rise 1.4% to 92.6mln bpd in 2014. (BBG)

According to an NOC spokesman protesters have shut Libya’s pipeline from the El Sharara oilfield to the Zawiya port, with the impact on production still unclear. (RTRS)

* * *

Finally, here is the overnight summary by Jim Reid of Deutsche Bank

After a week of gains across many assets including those in EM, perhaps an element of fatigue explained the S&P500’s (-0.03%) directionless performance yesterday. Though the index finished with its first negative session in five days, it oscillated within a narrow 6pt range for the vast majority of yesterday’s session, and the directionless tone wasn’t helped by the absence of any top tier data. Speaking of data, the weather looks set to cloud another month’s worth of US data after heavy snow and ice storms swept through much of the US yesterday – this time affecting the Southeast but it’s expected to move through to the Northeast region as well. The National Weather Service called the storm “an event of historical proportions” and it was severe enough for the Senate Banking Committee to postpone their hearing with Yellen which was originally scheduled for today. A new date for the hearing has not yet been announced.

Looking at the performance of Asia this morning, we’re seeing firmer directionality across most equity markets led by declines on the Nikkei (-1.65%) and HS China Enterprises (-1.08%) indices. Japanese equities are being weighed by Softbank (-3.2%) who indicated they would be willing to pursue another large US acquisition, less than a year after obtaining control of Sprint, the third-largest US wireless operator. Bloomberg mentioned that Softbank would most likely be considering a bid for T-Mobile US. The AUDUSD fell 1% and is again trading with a 0.89 handle following a weaker than consensus employment report. Australia’s unemployment rate rose to 10yr high of 6% in January (vs 5.8% previous), which was worse than the 5.9% expected by the market. In currencies, USDJPY is trading 0.4% weaker at a touch above 102 and the sterling continues to gain against major currencies following the Bank of England’s quarterly inflation report (more below). Following a weaker session for LATAM EM yesterday, Asian credit is trading with a weaker tone with the Asia IG index 5bp wider, and there is some weakness in the Indonesian bond complex.

Returning to the US, 10yr UST yields added 3.5bp yesterday to its highest level in two weeks and over the last two days has added almost 10bp. This brings the total retracement in yields during February to around +20bp, which is about half of the 38bp move lower that we saw during the month of January. The catalyst for yesterday’s softening of US yields were varied. The underperformance of gilts (+7.7bp) was perhaps the main driver as markets responded to the Bank of England’s quarterly inflation report. The Bank of England raised its growth forecasts yesterday and announced that it will effectively follow a much broader range of economic measures in making rate decisions, with the aim of lessening the spare capacity in the UK economy. The Bank reiterated its intention to keep rates low but said it will focus on 18 separate measures of spare capacity in Britain’s economy, including business surveys and the number of hours worked.

DB’s UK economist George Buckley describes the BoE has having returned to a regime of more “normal” policymaking. Guidance Phase 2 is not so much about providing conditional promises as it is about guiding the markets as to how policy accommodation will eventually be taken back. As we would expect, we saw a sharp move in the front end of the gilts curve where 3yr yields rose by 9bp, and GBPEUR firmed by 1.2%.

Comments from the St Louis Fed’s James Bullard also weighed on treasuries. Bullard commented that he was cautious about altering the tapering pace because of potentially significant impact of markets. Bullard added that “If we move off our baseline, it’s going to have pretty big repercussions. We’d be cautious in using that – it’s going to have to be a situation where you’re pretty sure things are moving off track”. Bullard said he is “still optimistic” about the outlook for the economy, predicting growth of 3% or more this year (Reuters). Bullard is considered a centrist on the Fed hawk-dove scale and was previously seen as a bellwether on the FOMC.

In Europe, though it hasn’t been on too many radar screens lately, it’s worth keeping an eye on the latest political developments in Italy where PM Enrico Letta is facing a challenge to his leadership from Democratic Party leader Matteo Renzi. Letta is reportedly under growing pressure to give way to Renzi, the 39-year old mayor of Florence, though the prime minister remained defiant at a press conference yesterday. A meeting of the Democratic Party’s 140-strong leadership group has been scheduled for today which will in part decide whether the party will continue to support Letta as leader of the coalition. According to Reuters, opinion polls suggest that Italian voters do not want a change of premier without elections, with a survey in Wednesday’s La Stampa suggesting that no more than 14% wanted to see Renzi taking over before a new vote. The recent political tensions have had little effect on Italian bond yields to date which remain at near eight- year lows, though we note that 10yr Italian bond yields rose for the first time in six days yesterday (+5bp).

Elsewhere in Europe, the Stoxx600 (+0.75%) outperformed its US counterpart on a relative basis, helped by some positive comments from the ECB’s Coeure who said that said that negative deposit rates were a “very possible” option. This sent EURUSD down 0.3%, but it has managed to recover more than half of those losses during Asian trading overnight. Coeure also said that the German Constitutional Court’s latest ruling does not change the status of the OMT programme.

Before we sign off, we’ll provide a quick update on the US and European Q4 reporting seasons. The S&P500 reporting season is drawing to a close with over three-quarters of constituents having announced earnings to date. It’s still relatively early days for the European reporting season with less than 50% of Stoxx600 constituents having reported at the time of writing. Overall, the statistics suggest that the S&P500 is outperforming the Stoxx600 with the percentage of earnings beats at 69% vs Europe’s 50%. On the revenues side, the S&P500 is running at a beat/miss ratio of 65:35 whereas the Stoxx600 is substantially lower at just 47:53, painting a still fairly mixed picture of top line demand at European firms. The Stoxx600’s revenue beats of 47% remains well below the approx long term average in the 50-60% range.

Turning to the day ahead, with the second round of Yellen’s Congressional testimony postponed due to the weather, the focus will be on US retail sales data for the month of December. Consensus expectations are for retail sales be flat MoM, and only slightly better (+0.1% MoM) on an ex-auto as well as ex-auto & gas basis. The other notable data releases today are US initial jobless. Following yesterday’s Chinese trade numbers, it worth watching Rio Tinto’s FY13 results for any further clues or commentary about Chinese commodity demand. Earnings updates from PepsiCo, Lloyds and BNP Paribas are also on today’s horizon.

Your rating: None

Share This:
free vectors