Global Stocks Surge, Oil Soars As Hopes For Central Bank Stimulus Return

Zero Hedge | by Tyler Durden on 01/22/2016 06:53

In retrospect it appears Tom DeMark was spot on with his Wednesday prediction, made just as the Dow Jones was down some 500 points that that very day was "an interim low" to be followed by a 5-8% rebound (at which point the selling would resume). In fact, those trading Japanese stocks saw virtually the entire predicted rebound take place in just one day as the Nikkei soared by almost 6% overnight, or nearly 1000 points, the biggest jump in 4 months, while risk everywhere else around the globe has likewise exploded higher, as crude has stormed back over $31/barrel.

In other words, overnight we have seen a tremendous relief rally from historically oversold conditions in which AAII bulls hit a 10 year low: largely as most predicted, despite (actually thanks to) even more negative global macro economic data.

There was just one problem: recall what DeMark said about the market forming a bottom:

Markets bottom when the last seller has sold and markets top when the last buyer has bought. We are looking for a bottom that's a secondary bottom where you make one bottom, you rally, make a lower low and the internals of the market show that there's strength and at the same time when we make that low there's a low of negative news: we don't want to see positive news from the government; we don't want to see positive news from central banks. That interferes with the rhythm of the market.

So what drove the overnight surge? Here is a sample of "explanatory" headlines from Bloomberg:

• Stocks Rebound on Stimulus Speculation
• Oil Rallies in Biggest 2-Day Surge Since August on Stimulus Bets
• Yen Investors Homeward Bound as BOJ Stimulus Seen Boosting Bonds

To be sure, it all started with Draghi's latest jawboning of risk higher, which sent oil surging above $28, pushing up all risk assets with it, on expectations that March is the date when the ECB will boost its QE, memories of the December slaughter long forgotten.

In case it is still unclear, Bloomberg lays it out: "The turnaround in sentiment came amid signs central banks may be prepared to act after $7.8 trillion was erased from the value of global equities this year on China’s slowdown and oil’s crash. Diminished inflation expectations and a strengthening yen are seen as increasing pressure on the Bank of Japan to enlarge stimulus at its meeting next week. China will keep intervening in its equity market to “look after” investors and has no intention of further devaluing the yuan, Vice President Li Yuanchao said."

And just in case, here is another explainer: "There is hope of more stimulus in March and potential for even more stimulus in Japan and China, so if we get concrete positive economic news the rebound could last into next week,” said John Plassard, senior equity- sales trader at Mirabaud Securities. “I told my clients to fasten their seatbelts and wait for better news, and this is finally happening."

In other words, more of the same that brought the market to the same unsustainable level from which we just had a crash big enough to validate half a recession. No wonder even JPM says to sell all rallies.

For now, however, enjoy the bear-market rally in which stocks rose around the world, extending Thursday’s rebound from a 2 1/2-year low. Oil surged with emerging-market currencies, while haven assets retreated. European shares headed for the best week in two months, the euro approached a two-week low and Spanish and Italian bonds rallied after European Central Bank President Mario Draghi indicated he may bolster economic support as soon as March. Crude was poised for its steepest two-day rally in five months and the Russian ruble rebounded from a record low. Asian stocks climbed the most since September on speculation Japan and China may also take steps to calm markets.

“It’s a classic oversold bounce after Draghi’s comments yesterday and the noise on Japanese stimulus overnight, the question is where do we go from here,” said Veronika Pechlaner, who helps oversee $10 billion at Ashburton Investments, part of FirstRand Group. “It’s become harder and harder for stimulus to really support the economic fundamentals so it doesn’t mean a medium- and long-term change, but at least we have a bit more stable trading environment for a couple of days.”

Summarizing where we stand:

• S&P 500 futures up 1.4% to 1887
• Stoxx 600 up 2.5% to 337
• FTSE 100 up 2.1% to 5893
• DAX up 1.8% to 9747
• German 10Yr yield up 4bps to 0.49%
• Italian 10Yr yield down 4bps to 1.52%
• Spanish 10Yr yield down 5bps to 1.67%
• MSCI Asia Pacific up 3.7% to 119
• Nikkei 225 up 5.9% to 16959
• Hang Seng up 2.9% to 19081
• Shanghai Composite up 1.3% to 2917
• S&P/ASX 200 up 1.1% to 4916
• US 10-yr yield up 4bps to 2.07%
• Dollar Index up 0.18% to 99.24
• WTI Crude futures up 4.6% to $30.90
• Brent Futures up 5.5% to $30.86
• Gold spot down 0.4% to $1,097
• Silver spot up 0.3% to $14.14

And just like that, we have gone from epic gloom and doom and a 560 Dow Jones plunge to sheer euphoria in about 48 hours.

* * *

Looking closer at regional markets, we start in Asia where equity markets traded mostly higher following the positive close on Wall St. in the wake of ECB President Draghi's dovish comments, while a rebound in the energy complex and hopes of BoJ easing also bolstering sentiment. Nikkei 225 (+5.9%) outperformed as the weaker JPY supported exporters, while reports that the BoJ is said to be considering further easing saw the index advance by nearly 1000 points. Elsewhere, the ASX 200 (+1.1%) was led higher by gains in energy and large mining names, while the Shanghai Comp (+1.3%) was also led by the crude recovery, despite underperforming after Shanghai margin debt fell for the 15th consecutive day which is the longest streak of declines on record. Finally 10yr JGBs traded flat initially tracked the losses in USTs, but then pared with the BoJ also in the market for JPY 1.26tr1 of government debt.

BoJ is said to be considering further easing amid economic uncertainty, with the central bank said to be mulling measures to address the impact of the slump in oil prices on its price target and is likely to extend the time frame to reach the price-goal, according to a senior official.

Top Asian News:

• PBOC Said to Tell Lenders to Cancel Repos With Excessive Rates: Some banks are said to have been set rate caps for such loans.
• Soros Says China Hard Landing Will Deepen the Rout in Stocks: He’s betting against Asian currencies, buying Treasuries.
• SoftBank’s Slide Leaves It Worth Less Than Stake in Alibaba: 4-day stock slide triggered by rising pessimism about Sprint’s ability to pay down debt.
• China Vice President Vows to ‘Look After’ Stock Market Investors: Leaders will make market dynamic while boosting regulation.
• Japanese Stocks Jump Most in Four Months Amid Stimulus Signals: Nikkei-225 closed up 5.9%, most since Sept. 9.
• Islamic State Threat Reaches India Before Hollande Visits: Police arrest four for plotting attack at Hindu holy site.

In Europe, risk on appetite is in full swing in Europe, following a positive close in Asia after energy held onto, and built upon gains before European participants came to their desks. Comments yesterday from ECB's Draghi that the March meeting is live in terms of policy decisions, has continued to bolster equity markets this morning. Peripheral bond yield spreads are also tighter in early trade, as Draghi's comments linger in participants ears. Comments from the ECB's survey of professional forecasters today seems to justify Draghi's comments —they downgraded the 2016 inflation forecast to 0.7% from 1.0%.

The Stoxx Europe 600 Index rose 2.6 percent at 10:53 a.m. in London. The index is heading for a 2.3 percent weekly advance -- its biggest such gain since November -- after rising the most in a month yesterday following Draghi’s indication that monetary policy will be reviewed as early as March. He reiterated his stance in Davos on Friday.

Banca Monte dei Paschi di Siena SpA surged 12 percent after saying it’s bringing forward the board meeting on its results to reassure markets. Chairman Massimo Tononi separately told Il Sole 24 Ore that the lender has no plans for a capital increase, while not ruling out the possibility of being helped by the Italian government’s plan for a bad bank.

Top European News

• Draghi Says ECB Has ‘Plenty of Instruments’ to Revive Inflation: ECB president concerned about outlook for euro- area inflation; is determined to reach his price-stability mandate. Euro Area Hit by Market Volatility as ECB Mulls March Action
• SAP Raises 2017 Forecasts as Cloud Business Growth Quickens: Co. raised the top end of its forecast for 2017 sales by 7% to as much as EU23.5b.
• U.K. Retail Sales Plunge as Mild Weather Curbs Clothes Spending: volume of sales including fuel fell 1%, biggest drop since September 2014.
• ABN Amro, Rabobank Say They Meet ECB Capital Requirements: ABN Amro required to hold CET1 capital level of 10.25% in 2016; Rabobank says it’s required to maintain CET1 ratio of 9.5%.
• Goldman Makes U-Turn on Euro Forecast After 6 Weeks: Analysts revived their bearish call for currency to drop to 95c in next 12 months.

In FX, EUR/USD looks to be on the mend after yesterday's ECB press conference set up March as a potential month of further accommodative action. The Negative manufacturing and services data from the Eurozone this morning, showing growth in both of these sectors at 11 month lows, has been brushed aside.

Russia’s ruble jumped 3.2 percent, trimming this month’s slide to 8 percent. That’s the worst performance among 31 major currencies worldwide. Malaysia’s ringgit jumped 1.9 percent and South Korea’s won climbed 1.1 percent on Friday. A gauge of exchange rates for 20 developing nations rose 0.6 percent.

Hong Kong’s dollar gained the most in 12 years, rising as much as 0.4 percent, before trading 0.3 percent stronger to 7.7916 against the dollar. The currency, which sank to an eight-year of HK$7.8295 on Wednesday, erased the week’s loss and returned to the strong side of its HK$7.75-HK$7.85 trading range.

The yen was set for its biggest weekly drop in more than two months. The currency was down 0.4 percent, extending its weekly decline to 1 percent. The euro fell 0.3 percent against the dollar. Monetary easing tends to debase the value of currencies.

In commodities, WTI and Brent have been continuing their bullish moves during the European session, in in the wake of gains in the US/Asia sessions . Gold has weakened in early EU trade after risk on sentiment continued after ECB's Draghi's comments yesterday pushed equities higher. Industrial metals are higher across the board on the back of increased risk appetite.

Brent crude rose as much as 6.3 percent to $31.10 a barrel on the ICE
Futures Europe exchange, before trading at $30.83. Prices headed for an
11 percent two-day advance, the biggest since the end of August. In New
York, West Texas Intermediate crude climbed 4.6 percent to $30.89. U.S.
natural gas headed for a weekly gain as a snow storm approached the
eastern U.S. Futures for February rose 1.9 percent this week and were
little changed on Friday at $2.130 per million British thermal units.

Looking at the day ahead, this morning in Europe will be all about the January flash PMI indicators where we get manufacturing, services and composite readings for Germany, France and the Euro area. Also due out this morning will be the December retail sales and public sector net borrowing data for the UK. Across the pond this afternoon in the US the early print will be the Chicago Fed national activity index reading for last month, before we then get the flash January manufacturing PMI, December's existing home sales data as well as perhaps the most significant data this afternoon - the conference board’s leading indicators. First thing this morning we should also hear from ECB President Draghi again, speaking in Davos at the World Economic Forum, while Governing Council member Weidmann is also scheduled to speak later this morning. So there could be conflicting signals here. On the earnings front just 6 S&P 500 companies are due to report with General Electric being the highlight.

Bulletin Headline Summary frrom RanSquawk and Bloomberg

• Comments yesterday from ECB's Draghi that the March meeting is live in terms of policy decisions, has continued to bolster equity markets this morning (Euro Stoxx +2.6%)
• With oil comfortably back above USD 30.0, CAD continues its recovery to record a 5 cent retracement (through 1.4200) from multi year highs seen this week, USDRUB dipped back under 80.00 after yesterday's sharp hit to 86.00
• Highlights today include: US Manufacturing PM! and existing home sales, comments from ECB's Nowotny and Coeure as well as BoE's Cunliffe and Forbes
• Treasuries lower in overnight trading as oil rises and world equity markets rally on hopes of more central bank interventions to help financial markets.
• Over the seven weeks until the March 10 gathering, ECB officials are likely to try to guide investors to avoid a repeat of last month’s meeting, when fresh stimulus fell short of predictions stoked at the previous decision
• Fallout from slumping commodities and China’s slowdown has investors increasingly predicting that the Federal Reserve will slow its campaign to raise interest rates and that the ECB and BOJ will soon deploy more stimulus
• The Federal Reserve’s efforts to ensure its interest rate increase filters through to the broader U.S. economy have found an unexpected counterparty: foreign central banks
• Violent swings in global markets fretting over the Chinese economy are being exacerbated by tougher capital rules imposed on the world’s biggest banks, according to former Barclays Plc CEO Bob Diamond and Goldman Sachs President Gary Cohn
• A secret -- just how much of America’s debt does Saudi Arabia own? -- unanswered since the 1970s under an unusual blackout by the U.S. Treasury has come to the fore as Saudi Arabia is pressured by plunging oil prices and costly wars
• Goldman Sachs revived its bearish call for the Euro to drop to $0.95 in the next 12 months on Thursday, less than two months after changing its 2016 year-end call for the euro to $1
• U.K. retail sales plunged 1% m/m in December, the most in more than a year, as mild weather damped clothing demand and early discounting boosted spending the previous month
• A dangerous winter storm will bring snow by the foot to the U.S. mid-Atlantic, including Washington, threatening at least 50 million people in its path while canceling thousands of flights and closing schools and government offices
• Sovereign 10Y bond yields mostly wider. Asian and European stocks rally; U.S. equity-index futures rise. Crude oil, copper and gold higher

US Event Calendar:

• 8:30am: Chicago Fed Nat Activity Index, Dec., est. -0.15 (prior -0.3)
• 9:45am: Markit US Manufacturing PMI, Jan. P, est. 51 (prior 51.2)
• 10:00am: Existing Home Sales, Dec., est. 5.2m (prior 4.76m)
• Existing Home Sales m/m, Dec., est. 9.2% (prior -10.5%)
• 10:00am: Leading Economic Indicators, Dec., est. -0.2% (prior 0.4%)

Top Global News

• Paralyzing Storm Threatens U.S. East as Washington in Bull’s-Eye: Washington, Baltimore more than a foot of snow by Saturday; New York may get buried in 6-10 inches.
• Goldman Says Investors Overreacting to China Creates Problems: Investors tend to overstate China’s impact on world, according to new report.
• Sprint to Report Earnings a Week Earlier Amid Investor Worries: Co. expected to post first full year of subscriber gains in 8 years on Jan. 26.
• Starbucks Blames Paris Attacks for Hurting European Sales: “dramatic decline” in consumer, tourist activity in W. Europe following Nov. Paris attacks.
• Google’s Android Revenue Put at $31b by Oracle Lawyer: Analysis of Google’s tightly held financial information was disclosed Jan. 14 by an Oracle attorney.
• Google Paid Apple $1b to Keep Search Bar on IPhone: Apple received $1b from its rival in 2014, according to transcript of court proceedings from Oracle’s copyright lawsuit against Google.
• AmEx’s Chenault Braces for ’New Reality’ as Profit Declines 38%: CEO outlined plan to cut costs by $1b by end-2017, including further restructuring.
• SunEdison to Hand Solar Farms Right Back to the Previous Owners: Co. outlined Wednesday details of 4 Hawaii, Utah assets involved in handover.
• Commodity Rout Spurs Moody’s to Review Dozens of Ratings: 69 U.S. E&P cos., as well as 11 mining cos., put under review for downgrade.
• Junk Bond Market Braces for What Could Be a $117b Logjam: Securities maturing in 10 years or more could be cut to junk by end-2017, say UBS strategists.
• Dimon’s Pay Jumps to $27m, Mostly Tied to Performance: Bankin creased CEO’s pay 35%, tying most of package to future performance.

DB's Jim Reid concludes the overnight wrap

The last time the market flirted with Mr Draghi's seductive sound bites it eventually got jilted at the easing aisle. However there was a hint of giving him a second chance yesterday with a fairly positive market reaction to pretty firm signaling that the ECB will ease again in March. Although the meeting is 7 weeks away could yesterday mark the start of another plate spinning cycle from the central banks? The market chatter is now looking towards Kuroda to signal more action when the BoJ meet this time next week. Will Yellen also signal a more cautious and dovish stance at the FOMC next Wednesday? We continue to think central bank money printing globally remains in the early stages. Such policies could go on for several years yet even if there are periodic pauses. Ultimately we continue to think monetary policy will finance fiscal spending but that will take a recession to focus policy makers’ minds. For now with inflation so low it would be strange if central banks didn't do more in the face of such market turmoil, low inflation and elevated risk factors. It won't be a major growth stimulant but any extra liquidity provided will have to go somewhere so it's too early to say the central bank era of elevating asset prices is over even if it's becoming more difficult to get the same response.

Notwithstanding another choppy session, European risk assets got the much needed ECB-stimulus boost yesterday with European equity markets finishing broadly 2% higher, although Italian equities (which have been hard hit of late) stood out after the FTSE MIB finished with a +4.20% gain. Draghi downplayed recent concerns over Italian banks which undoubtedly helped. Elsewhere the S&P 500 was up over +1.5% by the end of the European close, dragging US 10y Treasury yields back up above 2%, but hopes for a big bounce-back faded as the session wore on with the S&P 500 being pared back to close up just +0.52%. This came despite a much better day for Oil with the new WTI contract at one stage trading back up above $30/bbl. It closed just below that by the close of play ($29.53/bbl) but was still up +4.16% on the day.

The loss of momentum late in the US session hasn’t deterred bourses in Asia this morning however where we’ve seen strong gains across the region. The Nikkei (+5.65%), Hang Seng (+2.49%), Kospi (+1.94%) and ASX (+1.07%) are all up with markets in Japan in particular seemingly buoyed by a report in the Nikkei newspaper this morning suggesting that the BoJ is seriously mulling an expansion of its current QE programme. This seems to have offset a slightly lower than expected flash manufacturing PMI for Japan (52.4 vs. 52.8 expected). Markets in China had been trading with modest losses but the Shanghai Comp and CSI 300 are back in positive territory at +0.52% and +0.48% respectively, the lag perhaps reflecting the latest MNI business indicator print for China which fell to 52.3 from 52.7 in December. Meanwhile Oil has extended gains in early trading and is rallying hard as we go to print (+3%) while Asia and Australia credit indices are 2bps and 4bps tighter respectively.

In terms of Draghi’s comments yesterday then, the ECB President highlighted that officials will review and possibly reconsider its policy stance at the next meeting. Importantly he made reference to the fact that while ‘the measures we decided in December were entirely appropriate at that time’, ‘since then these circumstances have changed’. In a strong signal of defiance Draghi said that ‘we are not surrendering in front of these global factors’ - namely plummeting oil prices and the slowdown in China. Draghi added that ‘we are adapting our instruments to the changing conditions’ and that ‘the credibility of the ECB would be harmed if we weren’t ready to revise the monetary-policy stance’ while also adamantly stating that the ECB has the ‘power, the willingness, the determination to act, and the fact that there are no limits to our action’.

The signal was also strong enough for our European economists to revise their call to an easing at the March meeting. The question instead becomes how and their baseline expectation is for a 10bp cut in the deposit rate and a change to the asset purchase programme. Absent a major euro crisis, they see the latter going no further than a front-loading of purchases, i.e. a temporary acceleration in the pace of QE and may be less than this if the global risks recede by March.

The market was clearly disappointed with the outcome in December after expectations had been set so high. So with seven weeks to go, expect a lot of focus and close scrutiny around all of Draghi’s comments and other ECB policy makers now. Given the possibility of a second chance, it’s hard to imagine Draghi letting expectations climb as high as they did last time round without being convinced of action.

In terms of the remainder of the price action yesterday, the rally for European risk assets didn’t end with equity markets as credit indices put in a strong performance too as Crossover and Main tightened 21bps and 5bps respectively. The Euro initially plunged over a 1% but actually rallied back later in the evening to finish more or less unchanged around the 1.09 mark. Meanwhile those gains for Oil yesterday came despite another bounce in US inventories last week according to the latest EIA data, although the increase was less than that reported by the API on Wednesday and so was seemingly a rare reason to help justify a leg up in prices.

Speaking of Oil, yesterday saw Schlumberger release its latest quarterly report, the first of the big US oil names to do so. The company reported a $1bn loss for the quarter alone which was actually less than expected although revenues missed relative to consensus. The bigger news however was that the company is to cut another 10,000 jobs, bringing total job cuts in the last twelve months to 30,000 in the face of plummeting energy prices. The positive announcement of a share buyback did however lend some support to the share price in post-market trading. Of the 18 S&P 500 names to release earnings yesterday just seven beat revenue expectations (below the overall trend this quarter) but 14 beat earnings expectations (in line with the overall trend).

Wrapping up, US economic data yesterday was a tad mixed. The January Philly Fed business outlook print came in at a slightly better than expected -3.5 (vs. -5.9 expected), a gain of 6.7pts from a downwardly revised December reading. Meanwhile the latest initial jobless claims print revealed an unexpected 10k rise to 293k (vs. 278k expected) which is the most in six months and continues what has been an upward trend from the October lows now. In the European session and away from the ECB the only data to report of was a slightly softer than expected Euro area consumer confidence print for this month (-6.3 vs. -5.7 expected).

Looking at the day ahead, this morning in Europe will be all about the January flash PMI indicators where we get manufacturing, services and composite readings for Germany, France and the Euro area. Also due out this morning will be the December retail sales and public sector net borrowing data for the UK. Across the pond this afternoon in the US the early print will be the Chicago Fed national activity index reading for last month, before we then get the flash January manufacturing PMI, December's existing home sales data as well as perhaps the most significant data this afternoon - the conference board’s leading indicators. First thing this morning we should also hear from ECB President Draghi again, speaking in Davos at the World Economic Forum, while Governing Council member Weidmann is also scheduled to speak later this morning. So there could be conflicting signals here. On the earnings front just 6 S&P 500 companies are due to report with General Electric being the highlight.