For the second night in a row, China, and specifically its currency rate which saw the Yuan weaken once more, preoccupied investors – and certainly those who had bet on endless strenghtening of the Chinese currency – however this time it appeared more “priced in, and after trading as low as 2000, the SHCOMP managed to close modestly green, which however is more than can be said about the Nikkei which ended the session down 0.5%. Still, the USDJPY was firmly supported by the 102.00 “fundamental” fair value barrier and as a result equity futures, which had to reallign from tracking the AUDUSD to the old faithful Yen carry, have been propped up once more and are set to open at all time highs. If equities fail to breach the record barrier for the third time in a row and a selloff ensues after the open in deja vu trading, it will be time to watch out below if only purely for technical reasons.
As DB reports, China continues to bubble nervously under the surface. Chinese equities yesterday hit 1 month lows and are 65% off the all time highs. There’s a mix of reasons but one of the biggest stories of the past week or so has been the depreciation of the Chinese currency, both onshore where USDCNY is up 1.0% over the past week and offshore where USDCNH is up 1.25%. Whilst these moves may not seem large in the context of other EM currencies, they are significant compared to the usual size of Renminbi moves. Whilst there has been some weak Chinese data which might explain part of the depreciation, the broad feeling is that this move has been driven by efforts by the PBOC to shakeout the large long Renminbi carry trade that has been built on the back of the view that the Chinese currency can only appreciate in value. Indeed worries at the PBOC may have been triggered by one sign of this carry trade in action – the premium with which offshore USDCNH has been trading over the tightly controlled onshore USDCNY value over the course of 2014. This premium has now largely disappeared. The total size of the carry trade is hard to estimate although even just looking at some of the onshore CNY positions accumulated, DB Asia FX strategist Perry Kojodjojo estimates that corporate USD/CNY short positions are around $500bn. The size of the carry trade and the fact that China saw significant capital outflows during the last period of substantial Renminbi depreciation in the summer of 2012 has led to concerns over what this might mean for both the Chinese economy and financial markets as well as broader global financial implications. Looking forward it’s possible that the PBOC is not attempting to actively engineer a sustained depreciation of the Renminbi but rather is attempting to increase the level of two-way volatility in the market to discourage the carry trade and also excessive capital inflows. In terms of the broad risk going forward the sheer scale of the challenge the PBOC has set out to tackle likely means they will have to move with restraint. This is certainly a story to watch.
Stocks in Europe gradually pared the opening gap higher and are seen lower across the board, with Bunds failing to sustain the early bid after the second consecutive technically uncovered auction from the Bundesbank. Nonetheless, sentiment toward core fixed income is somewhat supported by concerns over what is widely believed to be PBOC engineered exodus of long CNY carry trades may lead to further volatility. Still, the fact that the Shanghai Comp gradually edged into positive territory and USD/JPY staged a minor rebound O/N underpins the view that the recent erasure of the premium by the PBOC is temporary measure aimed at discouraging investor demand before widening the trading band in Q2.
There was little in terms of EU specific news flows this morning, instead market participants digested the release of the latest UK GDP reading which came in line with expectations and showed that total business investment was much stronger than expected (2.4% vs. Exp. 1.3%), with the Y/Y rising firmly to 8.5%. As a result, GBP
outperformed its major counterpart EUR this morning, albeit marginally, as a number of BoE members sought to downplay growing expectation of a rate hike. Going forward, market participants will get to digest the release of the latest new home sales data from the US, weekly DoE data and earnings by Target. Also, the US Treasury will auction off its 2y FRN and 5y note auction.
Overnight Headline Bulletin from Bloomberg and RanSquawk
- Bunds failed to sustain the early bid after the second consecutive technically uncovered auction from the Bundesbank.
- The release of the latest UK GDP reading came in line with expectations and showed that total business investment was much stronger than expected (2.4% vs. Exp. 1.3%), with the Y/Y rising firmly to 8.5%.
- China’s SAFE sought to downplay the recent price action by USD/CHY and stated that the recent CNY fall is normal compared to other markets.
- Treasuries steady, holding near week’s lowest levels after disappointing economic data yesterday; this week’s $109b auction cycle continues today with $35b 5Y notes and $13b 2Y floaters.
- 5Y notes yielding 1.542% in WI trading after drawing 1.572% in January. 2Y notes sold yesterday awarded at 0.340% vs 0.343% WI yield at 1pm, 8th straight 2Y to stop through according to Stone & McCarthy; largest indirects since June, primary dealers with smallest share since Nov.
- China’s benchmark money-market rate fell to a seven-month low amid speculation the central bank was intervening to weaken the yuan, a policy that would boost currency’s supply
- Ukraine is weighing measures to stem cash withdrawals after as much as 7% of deposits were taken from banks during last week’s bloody uprising, underscoring the need for action to fend off a default
- Merkel will call for a stronger EU in a speech in London that may disappoint Prime Minister David Cameron, according to a German government official with direct knowledge of her preparations
- Senate Majority Leader Harry Reid won’t consider raising the U.S. minimum wage to any level less than $10.10 an hour, though some of his fellow Democrats say they are ready to negotiate a lower amount
- Obama ordered the Pentagon to ready a so-called zero-option plan for Afghanistan after an unsuccessful months-long campaign to pressure Afghan President Karzai to sign an agreement that would leave a residual U.S. force there after the end of the year
- Sovereign yields mostly lower. EU peripheral spreads tighter. Nikkei -0.5%; Shanghai Composite gains 0.4%. European stocks lower, U.S. stock-index futures gain. WTI crude, gold and copper higher
US Event Calendar
- 7:00am: MBA Mortgage Applications, Feb. 21 (prior -4.1%)
- 10:00am: New Home Sales, Jan., est. 400k (prior 414k)
- New Home Sales m/m, Jan., est. -3.4% (prior -7%) Central Banks
- 12:00pm: Fed’s Rosengren speaks in Boston
- 7:30pm: Fed’s Pianalto speaks in Wooster, Ohio Supply
- 1:00pm: U.S. to sell $13b 2Y FRN in reopening, $35b 5Y notes
- POMO – 11:00am: Fed to purchase $1b-$1.25b in 2036-2044 sector
Overnight in Asia, JPY swaps reversed the initial flattening bias after the BoJ reduced the size of ultra longend bond buying operation by JPY 20bln from JPY 200bln.
In other Japan specific commentary, BoJ board member Ishida says BoJ stance is that it will adjust policy if needed, but not currently debating whether adjustments are needed for specific scenario. Ishida went on to say he is not seriously worried about economy undershooting BoJ’s main scenario or worried about sales tax hike impact on positive economic cycle. (RTRS)
China’s SAFE says two-way cross-border fund flows are normal as the CNY exchange rate moves towards its equilibrium level and market participants should deal with it actively. (BBG)
EU & UK Headlines
UK GDP (Q4 P) Q/Q 0.7% vs. Exp. 0.7% (Prev. 0.7%) – ONS says household expenditure and gross fixed capital formation including business investment and net trade are the biggest contributor to Q4 growth.
Germany sells EUR 2.438bln in 2046 2.50% Buxl Auction (New line), b/c 1.1 (Prev. 1.4) and avg. yield 2.53% (Prev. 2.64%), retention 18.7% (Prev. 16.75%) – second consecutive technically uncovered auction from the Bundesbank.
Market talk of ECB sources saying no consensus within governing council now for March policy move, March move possible if data and ECB governor Draghi supports. Negative deposit rate could send ‘problematic’ signal. (MNI)
Following the release of the preliminary EU GDP data for Q4 2013 last week, analysts at UBS believe that the Eurozone recovery remains on track and reiterate their above-consensus GDP forecast of 1.1% for 2014 and 1.5% for 2015, following -0.4% in 2013.
BoE’s Miles says people should not expect sudden rate rise and next year might be the right time but there is no certainty as there is quite a lot of slack in the economy. At the same time, BoE’s Dale said that he doesn’t know when rates might rise and any rate rise will depend on the speed of recovery with the rise set to be gradual and cautious. (BBG)
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)
Senate banking panel to consider Fischer, Brainard and Powell nomination to the Fed on March 4th. (BBG)
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.
In terms of notable stock movers, Lanxess shares came under distinct selling pressure and are seen among the worst performing stocks in Europe after the company said it had 2013 loss, citing unplanned writedowns of EUR 257mln in Q4.
Elsewhere, Credit Suisse shares fell this morning after a report alleged that the bank “helped its US customers conceal their Swiss accounts” and avoid billions of dollars in American taxes. Also of note, the FTSE-100 index underperformed its peers, with a host of Co.’s such as easyJet and Diageo trading ex-dividend.
Concerns over potential default of Ukraine and likely spill over effects into neighbouring states (Russia, Hungary), continued to drive EUR/HUF and spot RUB higher this morning, with USD/UAH trading above the 10.00 level for the first time since 1996. Of note, this morning, Russian Finance Minister Siluanov said that Ukrainian bail out deal is bound by bond covenants and that Ukraine covenants breach to trigger talks with Russia.
Looking elsewhere, GBP marginally outperformed its peers this morning, with the short-sterling curve trading marginally steeper following the release of the latest GDP data. Of note, good size option strikes due to expire at 1.6600/50 level (USD 1.6bln) at NY cut.
Analysts at Citi revised up its Brent price forecasts for 2014 and 2015 whilst widening out its WTI-Brent price forecast for 2014 due to tighter than expected global S/D balances and increasing pessimism over incremental supplies from Iran and Libya.
Iraq’s Rumalia oil field is set to raise output to 1.39mln bpd by years end, with Iraq exporting 2.7mln bpd of crude this month, and oil exports due to rise to 3.4mln bpd by years end. (BBG)
US API Crude Oil Inventories (Feb 21) W/W 822k vs. Prev. -473k
US API Cushing Crude Inventories (Feb 21) W/W -1,070k vs. Prev. -1,800k
US API Gasoline Inventories (Feb 21) W/W -314k vs. Prev. 1,400k
US API Distillate Inventories (Feb 21) W/W -693k vs. Prev. -676k
China is to raise fuel prices from tomorrow, with diesel prices increasing by CNY 200 per ton, and gasoline by CNY 205 per ton. (BBG)
Chinese copper importers put purchases on hold after a sharp price fall and tight credit cut spot demand, with bonded stocks in Shanghai estimated at 560,000-660,000 tonnes, premiums hit their lowest point since July 2013. (RTRS)
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We conclude with the overnight summary from DB’s Jim Reid
In fairly calm and generally buoyant markets, China continues to bubble nervously under the surface. Although the S&P 500 edged lower yesterday (-0.13%) it remains within 0.2% of its all-time highs. Meanwhile Chinese equities yesterday hit 1 month lows and are 65% off the all time highs. There’s a mix of reasons but one of the biggest stories of the past week or so has been the depreciation of the Chinese currency, both onshore where USDCNY is up 1.0% over the past week and offshore where USDCNH is up 1.25%. Whilst these moves may not seem large in the context of other EM currencies, they are significant compared to the usual size of Renminbi moves. Whilst there has been some weak Chinese data which might explain part of the depreciation, the broad feeling is that this move has been driven by efforts by the PBOC to shakeout the large long Renminbi carry trade that has been built on the back of the view that the Chinese currency can only appreciate in value. Indeed worries at the PBOC may have been triggered by one sign of this carry trade in action – the premium with which offshore USDCNH has been trading over the tightly controlled onshore USDCNY value over the course of 2014. This premium has now largely disappeared. The total size of the carry trade is hard to estimate although even just looking at some of the onshore CNY positions accumulated, DB Asia FX strategist Perry Kojodjojo estimates that corporate USD/CNY short positions are around $500bn. The size of the carry trade and the fact that China saw significant capital outflows during the last period of substantial Renminbi depreciation in the summer of 2012 has led to concerns over what this might mean for both the Chinese economy and financial markets as well as broader global financial implications. Looking forward it’s possible that the PBOC is not attempting to actively engineer a sustained depreciation of the Renminbi but rather is attempting to increase the level of two-way volatility in the market to discourage the carry trade and also excessive capital inflows. In terms of the broad risk going forward the sheer scale of the challenge the PBOC has set out to tackle likely means they will have to move with restraint. This is certainly a story to watch.
Outside of the Renminbi, China-related nervousness is showing up again this morning in both equities and credit. In equities, the Hang Seng China Enterprises Index (-0.25%) is underperforming other regional indices overnight, and Australian mining stocks are down 1.3%. On the credit-side, offshore Chinese high yield property bonds and investment grade SOE bonds continue to lag the rest of the market as aversion to the Chinese story continues. The Australian dollar is down 0.1%, and is poised to closer weaker against the greenback for the 6th time in the last eight days. Elsewhere in Asia, the Nikkei (-0.4%) is another notable underperformer, albeit on thin volumes.
Another interesting story at the moment is Italy although it’s more of a slow burning one. Overnight DB’s Marco Stringa has put out a comprehensive update entitled “Italy – Implementation, Implementation, Implementation”. In the piece he tries to quantify the potential impact of two key potential reforms in Renzi’s speech made before he obtained the confidence votes in the Upper and Lower Houses on 24 and 25 February. First, he thinks the government will target a EUR c10bn cut in the tax wedge in 2014. This could be increased to EUR15 and EUR20bn in 2015 and 2016 respectively if the savings from the planned expenditure cuts are not dispersed. The second is improving the efficiency of the public administration. A cut in the tax-wedge of EUR 10bn would not have too material an impact on growth. But a EUR 20bn cut in the tax wedge and a modest improvement of the efficiency of the public administration could nearly halve the gap between Italy’s potential GDP growth and that of Germany and France. The lack of detail in Renzi’s speech suggests that much of the groundwork has not been done ahead of the decision to replace ex-PM Letta. This is a potential concern in terms of the implementation phase. Furthermore, several of the headlines proposed by Renzi could disperse the country’s limited resources. Nevertheless, the report shows that even modest reforms could significantly improve the country’s public debt dynamics over the next 15 years if funded via expenditure cuts. That said, in a pessimistic scenario, the benefit of a small permanent cut in the tax wedge would be offset by decreases in the structural primary balance. To conclude after the ruling of the German Constitutional Court, the ability of the European allies to encourage Italy on a path of reform while shielding it from external shocks via the ECB’s OMT has decreased significantly. Hence, it is crucial that Italy pro-actively implements economic reforms before the next major internal or external shock hits the country.
Elsewhere in Europe, German QoQ GDP growth came in at +0.4% yesterday, slightly ahead of the Q3 number of +0.3% and unchanged from the flash estimate. As our German economists noted however the underlying components painted a mixed picture with stronger than expected net export numbers adding +1.1pp compensating for weaker than expected final domestic demand growth (which added +0.1pp) and a large drop in inventories. This marks a reversal from Q3 where net exports where negative and domestic demand was strong. It would be wrong to take too much from a single quarter of data, but such a reversal if sustained would be a worry for the European periphery. On that note yesterday also saw some weak data out of the European Periphery as we got Spanish PPI data for January which saw the rate of producer price inflation rate slip to -1.3% MoM (vs. +1.1% previously), leaving the YoY rate at -1.8% (vs. -0.6% previously). We also had weak Italian retail sales numbers with a reading of -2.6% YoY vs. +0.2% expected. In more positive news the European Commission yesterday raised its forecasts for eurozone 2014 and 2015 growth by 0.1pp each to 1.2% and 1.8% respectively.
News on the other side of the Atlantic was slightly more positive as housing data beat expectations across the board, with the Q4 House price purchasing index up +1.2% vs a market consensus estimate of +1%. The December Case-Shiller 20 City index also surprised to the upside (0.76% MoM vs 0.6% consensus). Staying on the housing theme, there were some noteworthy observations from home improvement-retailer Home Depot on the recent effect of inclement weather. The company said that this Spring is likely to be an especially strong season for the company as homeowners flock to Home Depot for repairs caused by the winter storms of January and February. The CFO said that the company knows “firsthand that many homeowners have some major repairs ahead of them”. Home Depot’s stock closed 4% higher yesterday, driving a 1.2% gain in S&P500 retail stocks. Offsetting some of the positive newsflow on the housing front, the Conference Board’s consumer confidence index fell to 78.1, short of consensus estimates of 80.0 and below last month’s revised 79.4. US equities hit an intra-day low shortly after the confidence data. Elsewhere JPMorgan announced that it will be shedding 8000 jobs, predominantly in its mortgage unit reflecting weakness in refinancing volumes. JPM joins Wells Fargo and Bank of America in announcing home-lendingrelated job cuts in recent months.
Today looks set to be a relatively quiet day on the data front with the biggest release being UK Q4 preliminary GDP data. Consensus is expecting no change from the Advanced figures of +0.7% QoQ and +2.8% YoY. If the YoY figure remains at +2.8% this would be the highest YoY rate since Q1 2008. Maybe my building work is making a small difference! Staying in Europe we will also get French jobseekers data and German consumer confidence which will be interesting to see after the downward revisions yesterday to Q4’s QoQ German domestic demand. In the US we will get more Housing data with January new home sales. We will also hear from the Fed’s Rosengren who speaks on the economy in Boston.