For the second day in a row non-US markets are largely unchanged and US equity futures begin the session where they ended (that they will close much higher is a different question). The AUD responded adversely following news that Australia saw a substantial drop in job creation, with 10.8K jobs lost, roughly the same as was estimated should be gained: perhaps that Chinese "recovery" is not trickling down because it is purely on Excel? Europe continued to inch closer to the German elections by the look of the increasingly worse economic data, which today showed Industrial Production for the Eurozone slid -1.5% on expectations of a -0.3% drop, down from a revised 0.6% print. But as long as people are buying the peripheral success story all is well: supposedly that will continue until Greece gets at least its next bailout. Italian FTSE-MIB underperforming as market participants look forward to the resumption of hearing by Italian lawmakers on the (never-ending) Berlusconi saga. The under performance is also evident in the bond market, where IT/GE 10s are wider by 3bps, whereas SP/GE 10s is actually trading tighter by 1.5bps.
Jitters from Syria still abound, as confirmed by reports from the Israeli army that two shells had hit the Southern Golan region. Despite the reports that the shelling appeared to be errant, WTI remains near session highs as markets remain sensitive ahead of the meeting between US Secretary of State Kerry and Russian Foreign Minister Lavrov in Geneva over the next two days. Buying of the 10Y is also prevalent and the yield on the benchmark bond was has dropped below 2.90%, or at 2.88% at last check. Today's key economic news in the US session will be the weekly claims report, the Fed buying 10 Year bonds at 11 am followed by the Treasury selling 30 Year bonds at 1 pm (this follows the Fed buying 30 Year bond yesterday: yes ironic).
Overnight news bulletin from BBG and Ran:
- Russian President Vladimir Putin commented that no one doubts that poison gas was used in Syria and that there is every reason to believe it was used not by the Syrian Army, but by opposition forces, to provoke intervention by their powerful foreign patrons, who would be siding with the fundamentalists.
- Treasuries extend gains seen after yesterday’s well-bid 10Y reopening; week’s auctions end with $13b 30Y bonds. WI yield 3.830%; stopout at that level would be highest in over two years.
- Euro-area industrial output fell 1.5% in July, more than forecast, after increase of 0.6% in June
- Australian jobs fell for a second month in August, with the number of people employed falling 10,800 from the previous month, more than forecast
- New Zealand’s central bank said interest rate increases “will likely be required next year” as the economy strengthens and inflation picks up
- Bank of England Governor Mark Carney said BOE tightening will begin with a rate increase; “our exit strategy from QE would be that we would look to adjust base rates first before we would consider a sale of assets”
- Vodafone Group Plc’s EU7.7b takeover of Kabel Deutschland Holding AG is under threat amid speculation that a hedge fund that boosted its stake in the target did so to squeeze extra cash from the deal
- Slovenia may need ESM funds to help banks as the government may not be able to stabilize financial industry without help from outside, Handelsblatt says
- Sovereign yields lower, EU peripheral spreads tighter. Nikkei falls 0.26% as JPY gains to trade 99.35. Shanghai Composite +0.6%. European stocks, U.S. equity-index futures fall. WTI crude higher, gold, copper decline
- Deutsche Bank have upgraded their Euro area GDP growth expectations to -0.2% in 2013 (prev. -0.4%) and 1.2% in 2014 (prev. 1.0%).
Asian Headlines
Bank of America have raised their Chinese 2013 GDP forecast to 7.7% from 7.6%.
There were conflicting reports in Japanese press overnight on a domestic sales tax hike, with Yomiuri writing that PM Abe is to raise the rate in April as scheduled, however this was denied by the Japanese chief cabinet secretary Suga, who said no agreement has been reached.
EU & UK Headlines
In spite of political risks surrounding the Italian government, where lawmakers are to reconvene over the political future of Silvio Berlusconi after allies of the billionaire media tycoon threatened to bring down Prime Minister Enrico Letta's unstable ruling coalition, the Italian Treasury successfully sold EUR 5.5bln in BTPs this morning (in line with aim).
- Sold EUR 4bln in 2.75% 2016, b/c 1.52 (Prev. 1.34) and gross yield 2.72% (Prev. 2.33%) - highest yield since Oct'12.
- Sold EUR 1.5bln in 4.75% 2028, b/c 1.36 (Prev. 1.73) and gross yield 4.88% (Prev. 4.67%)
Deutsche Bank have upgraded their Euro area GDP growth expectations to -0.2% in 2013 (prev. -0.4%) and 1.2% in 2014 (prev. 1.0%).
Eurozone Industrial Production SA (Jul) M/M -1.5% vs. Exp. -0.3% (Prev. 0.7%, Rev. 0.6%)
Eurozone Industrial Production WDA (Jul) Y/Y -2.1% vs. Exp. -0.2% (Prev. 0.3%, -0.4%)
ECB's Asmussen said it is too early to tighten accommodative monetary policy. Elsewhere, ECB's Hansson said the ECB has discussed another LTRO, but so far the policy package the ECB has seems appropriate.
BoE's Carney says expected that yield curve would steepen after introduction of forward guidance, central bank has not dropped 2% medium term inflation target.
BoE's Carney says will keep QE at GBP 375bln at minimum until 7% hit; will not begin to consider tightening until 7% reached.
BoE's Miles said policy can be more expansionary if needed and forward guidance says the BoE is not looking to tighten. Miles said when the time comes to tighten policy, would prefer to raise interest rates before selling QE gilts.
UK DMO sold GBP 3.75bln in 2.25% 2023 gilts, b/c 1.59 (Prev. 1.76) and tail of 0.4bps (Prev. 0.2bps), yield 2.976% - highest since June 2011.
US Headlines
US foreclosure filings declined 34% as property prices declined, which is the 35th month of declines on an annual basis, according to RealtyTrac.
Equities
Equities failed to sustain a marginally higher open and are seen lower across the board, with the Italian FTSE-MIB underperforming as market participants look forward to the resumption of hearing by Italian lawmakers on the (never-ending) Berlusconi saga. Utility related stocks fared poorly this morning, with EDF shares
under pressure amid share placements (UBS/Norges bank), while RWE in Germany was seen as the worst performing stock following reports by Handelsblatt, citing people close to supervisory board, that the CEO plans to suggest a dividend below last year's payout of EUR 2 per share.
FX
Cautious sentiment, which in turn supported USTs meant that unfavourable interest rate differential flows weighed on USD/JPY this morning. Technically, the pair looks set to make a test on the 100DMA line at 99.02 and then the 50DMA line at 98.80. Elsewhere, with EUR/GBP trading close to its lowest levels since mid-Jan meant that GBP/USD outperformed EUR/USD, albeit marginally, with EUR/USD testing the 21DMA line to the downside at 1.3290.
RBNZ Official Cash Rate (Sep 12) M/M 2.50% vs. Exp. 2.50% (Prev. 2.50%) - RBNZ Governor Wheeler said he expects to keep key rate at 2.5% through 2013 and is likely to raise interest rates in 2014. Wheeler further added NZD remains high and that the 90-Day bill forecasts indicates rates rising in H1 2014.
Commodities
Russian President Vladimir Putin commented that no one doubts that poison gas was used in Syria and that there is every reason to believe it was used not by the Syrian Army, but by opposition forces, to provoke intervention by their powerful foreign patrons, who would be siding with the fundamentalists. Putin added that reports of militants preparing another attack — this time against Israel — cannot be ignored.
OPEC Secretary General Abdalla El-Badri commented that the oil market is well supplied.
IEA raised 2013, 2014 world oil demand forecasts by 70,000bpd, adding that it sees less need for OPEC crude in 2014 as US supply booms. Furthermore, IEA sees emerging-market currency changes affecting oil demand and that Mexico's oil reforms may lead to higher production.
Israel says two shells from Syria hit Southern Golan, initial evidence shows shelling was errant.
* * *
We conclude with the overnight event recap from DB's Jim Reid
The probability of some kind of tapering next week has probably been getting ever higher since September started due to the rebound in markets. The S&P 500 (+0.31%) climbed for the 7th successive day yesterday as markets continue to welcome the back-down in Syrian tension and hopes are also being raised that last Friday’s weaker-than-expected nonfarm payrolls will deliver nothing more than a “mini-taper” at next week’s FOMC. On the Syrian situation, Russian President Vladimir Putin penned an interesting Op-Ed in the NY Times which was published overnight. In the Op-Ed, Putin challenges the arguments put forward by Obama, writing that “No one doubts that poison gas was used in Syria. But there is every reason to believe it was used not by the Syrian Army, but by opposition forces, to provoke intervention by their powerful foreign patrons”. So while military action seems more distant at the moment, the global political debate looks likely to rumble on in the background for a while.
While the S&P500 continues its march back towards the 1,700 mark (now less than 11pts away) it’s important to emphasise that the improved sentiment has also benefited EM in a significant way. Indeed, the positive momentum that started at the beginning of this month continued as the ZAR, MXN and BRL added 1.1%, 0.3% and 0.3% against the USD yesterday. Against this backdrop the yields on Brazil, Colombia and Mexico dollar bonds collapsed by 16bp, 9bp and 5bp respectively yesterday.
Looking at our screens this morning, some of the positive sentiment from the US session has rolled over into Asian markets. The improvement in sentiment in LATAM markets continues to help Asian EM sovereigns and we are seeing 0.25% to 0.5% gains across most Asian equity indices. In the FX market, AUDUSD is down 0.8% after disappointing Australian labour market data.
Outside of the credit markets, there was another round of lukewarm US mortgage application data which fell 13.5% in the week ending September 6th leaving us wondering whether at some point this will translate in weaker housing data. Amongst the detail, the refinancing index slumped 20%, now off 71% since its 2013 high in May and at its lowest level since June 2009. This seems to be having an effect on the major US mortgage lenders, including Citigroup, Wells Fargo and Bank of America who have all announced staffing cuts in their mortgage origination businesses in recent weeks.
In spite of the firmer sentiment in equity and credit markets, US treasuries managed to unwind all of Tuesday’s losses, with 10yr yields firming 5bp to 2.91%. A very solid 10yr treasury auction spurred most of yesterday’s gains but we are also seeing a further 3bp tightening in 10yr yields in Tokyo trading this morning (2.88% as we type). Off the back of the moves in treasuries, Global bond yields firmed yesterday with the notable exception of Portugal (10yr +5bp) after the country’s Deputy PM said the country is trying to persuade the troika to further ease budget targets for 2014.
Looking at the day ahead, perhaps the most watched data will be US jobless claims heading into next week’s FOMC. The ECB publishes its monthly report today and Draghi will be speaking at an event in Latvia. Data on Euroarea industrial production for July and Euroarea consumer inflation for August are scheduled for today. Italy will be auctioning 3yr, 5yr and 15yr bonds.