The key overnight event was the much anticipated, goalseeked and completely fabricated Chinese economic data dump, which was both good and bad depending on who was asked: bad, in that at 6.9% it was below the government's 7.0% target and the lowest since Q1 2009, and thus hinting at "more stimulus" especially since industrial production (5.7%, Exp. 6.0%) and fixed spending also both missed; it was good because it beat expectations of 6.8% by the smallest possible increment, and set the tone for much of Europe's trading session, even if Asia shares ultimately closed largely in the red over skepticism over the authenticity of the GDP results. Worse, and confirming the global economy is now one massive circular reference, China accused the Fed's rate hike plans for slowing down its economy, which is ironic because the Fed accused China's economy for forcing it to delay its rate hike.
Not buying the manipulated "data" were both plunging cotton prices which slid to 2009 lows, and Shanghai Rebar, which plunged more than 1% to a record low on Monday, underlining demand pressure in the top consumer of the alloy. China's crude steel output fell 3 percent in September from a year ago to 66.12 million tonnes amid shrinking domestic demand that analysts say could force more production cuts. "In our view, negative steel margins have no direct bearing on iron ore demand but they do reinforce the need to keep inventories at a minimum," Goldman Sachs analyst Christian Lelong said in a report. "Amid rising supply and a falling cost curve, we believe the correction in iron ore prices will resume in the short term until marginal producers are forced to exit the market."
Adding to the noise, Chinese Premier Li said that achieving China's growth target of about 7% is 'not easy' and has urged financial sector reforms to support the economy. Elsewhere, China National Bureau of Statistics spokesman said that China is still growing around 7% Y/Y and the slowdown in the nation is partly due to weakness in the global economy and Fed rate hike expectations.
Chinese data initially lifted both the Shanghai Composite (-0.1%) and the ASX 200 (-0.0%) but weakness in mining names reversed earlier strength, while Nikkei 225 (-0.9%) underperformed albeit off its worst levels as JPY weakened.
European equities kicked off the week on firm footing, with the majority of major indices trading in positive territory (Euro Stoxx: +0.6%), bolstered by the better than expected Chinese GDP reading, despite still printing its lowest reading since 2009 as well as the indices being led higher by financials, after the Deutsche Bank (+3.5%) CEO announced a comprehensive restructuring at the bank. Separately, FTSE (0.0%) has underperformed today, weighed on by mining names, which saw weakness on the back of the Chinese industrial production data (Y/Y 5.70% vs. Exp. 6.00%), which has also weighed on the commodity complex.
In terms of US earnings, today sees Halliburton, Valeant Pharmaceuticals and Morgan Stanley report pre-market, while IBM are set to report after the closing bell.
Bunds initially saw weakness in line with the improvement in sentiment and strength seen in equities, however the German benchmark has now pulled away from their lowest levels of the session after finding support around the 156.40 level which marks the low print from October 14th. While elsewhere, Thursday's ECB is in focus this week with the majority of IB trading strategies being based on the assumption that this press conference will reveal hints of further easing, which is expected to remain positive for peripheral debt.
In FX, markets have seen commodity related currencies, and particularly AUD, outperform throughout the European session on the back of the aforementioned Chinese GDP reading, while EUR spent the majority of the European session in positive territory on the back of comments from ECB's Nowotny backtracking on last week's more dovish comments , with the central banker stating it is too soon to be discussing extending QE past September 2016 and also adding that China's slowdown will not have a large effect on the Euro area.
Commodities head into the North American crossover relatively soft after reacting negatively to the Chinese data, with focus on the industrial production figure, as oppose to the higher than expected GDP and retail sales, with Brent Dec'15 futures falling below the USD 50.00 handle overnight, with WTI sliding under $47 once more despite the so-called "stronger" Chinese data.
Looking ahead, the calendar is fairly light in terms of tier 1 data today with just the NAHB housing market index on deck at 10:00am in the US; participants will be looking out for further comments from ECB's Nowotny, as well as comments from Fed's Lacker and the Belgian EUR 2.3-2.8bIn in 7y, 10y and 30y bond auctions.
Market Wrap
- S&P 500 futures down less than 0.1% to 2025
- Stoxx 600 up 0.4% to 364
- MSCI Asia Pacific down 0.3% to 134
- Nikkei 225 down 0.9% to 18131
- Hang Seng up less than 0.1% to 23076
- Shanghai Composite down 0.1% to 3387
- S&P/ASX 200 up less than 0.1% to 5270
- US 10-yr yield up less than 1bp to 2.04%
- Dollar Index up 0.2% to 94.73
- WTI Crude futures down 1.3% to $46.65
- Brent Futures down 1.5% to $49.68
- Gold spot down 0.4% to $1,173
- Silver spot down 0.9% to $15.90
Bulletin Headline Summary
- Sentiment has been bolstered today by higher than expected Chinese GDP, despite printing its lowest reading since 2009
- On a sector breakdown, financials outperform after the Deutsche Bank CEO announced a comprehensive restructuring at the bank
- Looking ahead, today's highlights include comments from ECB's Nowotny and Fed's Lacker as well as earnings from Halliburton, Valeant Pharmaceuticals, Morgan Stanley and IBM
- Treasuries steady, holding last week’s gains after China’s GDP rose 6.9% in 3Q, while while better than forecast is the slowest quarterly growth rate since 2009.
- Saudi Arabia is delaying payments to government contractors as the slump in oil prices pushes the country into a deficit for the first time since 2009, according to three people with knowledge of the matter
- Canada Voters Head to Polls With Trudeau Poised to Oust Harper: Polls show 71% of Canadians want change in govt; Liberals poised to secure most seats in Parliament, though short of majority
- OPEC member states should cut crude output to boost prices to a range of $70 to $80 a barrel, Iran’s oil Minister Bijan Namdar Zanganeh said, even as his country prepares to ramp up production in the aftermath of economic sanctions
- Assad’s troops are marching on Aleppo, supported by Russian warplanes and Iranian special forces; should Syria’s largest city fall, the potential for another wave of refugees would be nightmarish, according to one European government official
- Merkel’s mission to reach out to Turkey prompted skepticism in Germany, where questions were raised about her offer to strengthen Turkish ties with the EU in return for stemming the continent’s refugee crisis
- John Cryan, co-chief executive officer at Deutsche Bank AG, is undertaking the biggest management shakeup in more than a decade and splitting the investment bank as he prepares to scale back the trading empire built by his predecessor
- Greg Reiter, Wells Fargo & Co.’s head of residential mortgage research who spent more than 25 years specializing in structured finance, has died. He was 52
- $32.5b IG priced last week, $1b HY, with $950m pulled. BofAML Corporate Master Index OAS narrows 1bp to +172, YTD range 180/129. High Yield Master II OAS narrows 8bp to +618, YTD range 683/438
- Sovereign 10Y bond yields mostly higher. Asian and European stocks gain, U.S. equity-index futures decline. Crude oil, copper and gold lower
US Event Calendar
- 10:00am: NAHB Housing Market Index, Oct., est. 62 (prior 62)
Central Banks
- 10:00am: Fed’s Brainard speaks on cutting regulatory red tape
- 11:00am: ECB’s Nowotny in Vienna panel discussion
- 12:00pm: Fed’s Lacker speaks on education in Richmond
DB's Jim Reid completes the overnight event wrap
We’re kicking off the week in China this morning where the latest monthly data dump is out. The main focus has been the Q3 GDP release where the number has dropped one-tenth and below 7% to 6.9% yoy. That’s the lowest since Q1 2009 although the print was ahead of street expectations of 6.8% as growth in the services industry quickened and helped to offset some of the further slowdown in the manufacturing industry. The rest of the data was on balance slightly negative. Although September retail sales (10.9% yoy vs. 10.8%) rose one-tenth and above market to the highest level since December 2014, there was less optimism to come out of the monthly industrial production (5.7% yoy vs. 6.0% expected) and fixed asset investment (10.3% yoy ytd vs. 10.8% expected) readings, falling four-tenths and six-tenths respectively from August – the latter to the slowest gain since 2000. Overall the better GDP will give hope that stimulus is kicking in but the data is still ambiguous elsewhere.
All things considered, there’s been relatively little reaction in markets post the numbers. In China the Shanghai Comp (+0.50%) and CSI 300 (+0.60%) are more or less where they were in the minutes prior to the data being released. Markets are slightly weaker elsewhere though with the Nikkei (-0.30%), Hang Seng (-0.20%) and Kospi (-0.20%) all seeing modest declines. The Asian FX space is mixed, with the likes of currencies in Malaysia and Taiwan weakening, but currencies in Australia, Indonesia and Korea all up. Oil markets (WTI -0.34%) are down a touch, although not helped by news over the weekend that stockpiles in Saudi Arabia have risen to the highest level since at least 2002. S&P 500 futures (-0.2%) are off a touch, while there’s been little movement in credit markets this morning.
A big focal point of the week ahead is likely to be the ECB meeting on Thursday. Recent developments have strengthened the house view that the ECB will announce a 6 month extension to QE at the December 3rd meeting, although a deposit rate cut is not ruled out. Our guys think Mario Draghi has a communications challenge this week. He will want to reiterate the dovish message of an ECB “ready, willing and capable” of action. At the same time, the ECB does not want the market pricing a policy outcome that is not justified by what they see as current fundamentals. Striking the right balance might lead to a sense of restrained dovishness. Also, expect Draghi to be asked to clarify whether the depo rate is at the lower bound which may give clues as to the composition of future easing.
Regular readers will be aware that we think central banks will be forced into extreme stimulus for years to come including the Fed. With that it was interesting to read this week's DB US fixed income weekly where they see a possibility that the next Fed move could be "Twist 2" which would extend the duration of their balance sheet with the aim of suppressing longer real yields. It's not their central forecast at the moment but they see the risks of this and a bull flattener are under priced.
Back to this week, another big theme will be earnings with a quarter of the S&P 500 reporting and 8% of the Stoxx 600. On Friday General Electric became the latest big name to report, with a similar theme playing out to much of what we’ve seen so far in the US earnings season after a beat at the profit level for Q3 was coupled with a miss at the top-line. In fact, with just over 10% of the S&P 500 having reported so far (58 companies), 74% have reported a beat at the profit line. However, the number of companies reporting a beat in sales revenue is sitting at just 48% so far.
Equity markets finished broadly higher across the board on Friday. The S&P 500 closed +0.46% following a late rally as oil bounced off the day’s lows, helping to cap a near 1% gain for the index last week and extend its near 1-month highs. Prior to this it was a decent session in Europe too for risk assets as the Stoxx 600 closed +0.59%, while in the credit space Crossover finished some 6bps tighter. Treasury yields and the US Dollar nudged up modestly. The benchmark 10y finished up 1.6bps at 2.034% although in reality continues to hover around the 2% mark that we’ve been at for most of October so far, while the Dollar index closed up +0.18%, but not enough to stop the third consecutive weekly decline.
In truth it was a reasonably quiet session for the most part with relatively little newsflow. Much of the focus remained on the US data which was a largely mixed bag. Industrial production came in as expected at -0.2% mom for September, while the August reading was revised up three-tenths but to a still soft -0.1% mom with 8 of the 9 months this year so far having now reported a negative monthly reading. Capacity utilization came in a touch ahead of market (77.5% vs. 77.3% expected) while manufacturing production beat (-0.1% mom vs. -0.2% expected). Although now largely outdated, the August JOLTS job openings data came in below expectations at 5.37m (vs. 5.58m) although it still remains at near record levels. In the details there were no changes to either the hiring or quits rates versus the previous month at 3.6% and 1.9% respectively. Meanwhile, there was better news out of the preliminary October University of Michigan consumer sentiment print which rose 4.9pts to 92.1 (vs. 89.0 expected) to put it back more or less in-line with the August reading after dipping in September. Inflation expectations were nudged lower however. Both the 1y and 5-10y expectations were down one-tenth to 2.7% and 2.6% respectively.
Elsewhere, over in Europe there was no change to the final September Euro area CPI print of +0.2% mom, enough to nudge the YoY rate down two-tenths and back into the deflationary territory at -0.1% for the first time since March. The core rate was confirmed at +0.9% yoy. Ahead of the ECB meeting this week, a Bloomberg survey shows that of 53 economists surveyed last week, 81% expect the ECB to step up QE by its first meeting in 2016, while 56% expect it to happen by December.
Meanwhile, ECB Governing Council member Nowotny was in the press again this weekend. After being questioned on the subject of extending QE beyond next September, Nowotny was noncommittal, saying ‘it’s too early to talk about this because we still have to wait almost a year till September next year’. This came on the back of comments from ECB board member Coeure on Friday which attracted some initial attention in markets. Coeure was quoted as saying that expectations towards the ECB are too high and that the central bank doesn’t have the instruments to answer all questions, although this was soon acknowledged as being in context of how the ECB is reacting to the European migrant crisis.
