Yesterday
morning, when musing on the day's key event namely Yellen's congressional testimony, we dismissed the most recent bout of European bank euphoria which we said "will be brief if not validated by concrete actions, because while central banks have the luxury of jawboning, commercial banks are actually burning through funds - rapidly at that - and don't have the luxury of hoping for the best while doing nothing." This morning DB has wiped out all of yesterday's gain.
As for Yellen's testimony, we said that "she can send stocks reeling with one word out of place" - the word in question being not what she said but what she didn't say, in this case not being dovish enough and thus supportive enough of risk. And the consequence is there for all to see as soon as their trading terminal boots up: everything is crashing (with the exception of China which is on holiday, and Japan which was mercifully closed yesterday). Here are the highlights:
- S&P 500 futures down 1.8% to 1814
- Stoxx 600 down 3.4% to 304
- FTSE 100 down 2.6% to 5525
- DAX down 2.9% to 8760
- German 10Yr yield down 7bps to 0.18%
- MSCI Asia Pacific up 0.1% to 117
- Hang Seng down 3.8% to 18546
- S&P/ASX 200 up 1% to 4821
- US 10-yr yield down 5bps to 1.62%
- Dollar Index down 0.42% to 95.49
- WTI Crude futures down 2.9% to $26.65
- Brent Futures down 1.7% to $30.31
- Gold spot up 1.9% to $1,220
- Silver spot up 1.5% to $15.50
It all started in Hong Kong where as
we reported last night, the Hang Seng Index plunged 3.9%, catching up with the week’s selloff as the market reopened from a holiday, and capping its worst Lunar New Year start since 1994.
Japan’s Nikkei Stock Average and China’s Shanghai Composite Index were both closed, but investors continued to pile into the yen, as virtually every carry trade has fallen apart in the past month. As a result, the dollar was down 1.8% against the yen at ¥111.28 after sliding below 111 briefly, a massive gain of nearly 300 pips in the past 24 hours, sending the Yen to the lowest level since October 2014 when Kuroda expanded QE.
In the first 9 days of this month, the Yen has risen 985 pips: That is biggest advance, in pip terms, since Oct. 1998; that month, the currency rose 1,563 pips from 130.03 to 114.40 over nine trading days ended Oct. 19. Elsewhere, the euro was up 0.4% against the dollar at $1.1325, its highest since October.
It wasn't just FX: European stocks slid toward their lowest since September 2013 and U.S. futures indicated equities will open nearly 2% and put the recent support level of 1812 in danger of being breached.
Among the key European movers was Societe Generale which tumbled 12% after reporting that quarterly profit missed estimates as earnings at the investment bank fell and it set aside provisions for potential legal costs. Elsewhere, Rio Tinto Group slipped 4.1% as it scrapped its progressive dividend policy and set out new spending cuts.
“Financial markets are repricing for a global growth slowdown,” said Tim Condon, head of Asian research at ING Groep NV in Singapore. "Expectations that monetary policy would be able to do much have diminished considerably.”
Just as troubling is that Swedish shares slid and the OMX Stockholm 30 Index dropped 3.% despite Sweden’s central bank going even deeper into NIRP, cutting its interest rate from -0.35% to -0.5%, lower than the expected -0.45%. The yen leaped to its highest in more than a year. Major sovereign bond markets rallied, pushing U.K. gilt yields to a record low. Gold rose beyond $1,200 an ounce, while U.S. oil traded below $27 a barrel.
This is troubling, because as Bloomberg notes, "signals by central banks from Europe to Japan that additional stimulus is at the ready are failing to ease investor concern that global growth will keep slowing." This means that it is no longer just a joke that central banks are losing credibility: judging by the markets' reaction it is all too real. To this point, yesterday we wondered if Yellen will make bad news good news again. She has failed:
“Over the last few years when we got bad news, equity markets would rally because they would interpret this as potential for central banks to go more dovish,” said Mohit Kumar, head of rates strategy at Credit Agricole SA’s corporate and investment bank unit in London. “Now that correlation is shifting to bad news is actually bad news. Investors are concerned over central banks’ policy options given the market is driven by factors over which they have little or no control over.”
Imagine that: investors investing without a central bank to hold their hand.
Among other things crashing: bond yields - the 10Year plunged to 1.62%, the lowest level since May 2013 as the entire treasury complex prepares for NIRP.
Not everything was crashing however: as central planners lost control, the dull, boring yellow metal known as gold was up about 4% overnight and was trading at $1240 moments ago, well above the level it hit when the Fed ended QE3, and outperforming every asset class in that time period.
Also surging are peripheral European yields, most notably in Portugal and Greece both overf 30 bps wider, as suddenly 7 years of financial dirt kicked under the rug thanks to central bank jawboning and futile actions, re-emerges for all to see, and to be reminded that nothing was ever fixed!
In short, the market is threatening Yellen with a crash ahead of her 2nd testimony today this time before the Senate. We doubt she will comply, so the market will just have to try harder.
Here are the top news from overnight:
- Yellen Suggests Fed May Delay Rate Rises, Not Abandon Them: Fed chair non-committal on possible use of negative rates
- Assessing Yellen’s Warning That Markets Pose a Threat to Economy: Bear markets usually come ~9 months before recessions
- Mylan Slumps, Meda Soars on $7.2 Billion ‘Wealth Destroying’ Bid: Price represents a 92% premium to Meda’s close on Wednesday
- Sanders Raises $7.1 Million After New Hampshire Win: comes after Tuesday’s victory speech declaration that he was “going to hold a fundraiser right here, right now, across America”
- Clinton Reassesses Campaign With Thursday Debate Next Test: New Hampshire margin for Sanders puts Clinton on defensive
- Twitter Troubles Deepen as Lack of User Growth Threatens Sales: Dorsey says making product easier to use is top priority
- Amazon to Repurchase as Much as $5 Billion of Its Own Shares: co. commented in filing yday
- U.K. Bond Yield Drops to Record-Low as Investors Seek Safety: U.K. plans to auction 30-year securities later Thursday
- Swedish Central Bank Unleashes More Stimulus After Krona Warning: Sees scope to cut repo rate further
- ‘Brexit’ Vote Is Clouding U.K.’s Growth Outlook, CBI Says: Business lobby downgrades 2016 growth forecast to 2.3%
- Gold Soars Above $1,200 as Fed Chief Signals Go-Slow on Rates: set for 9th gain in 10 days on Fed chief’s remarks
- Oil Above $55 Is a Long-Term Inevitability, Maersk CEO Says: sees global demand pushing oil price higher over time
- Worst Still Ahead for Mining Industry After Losing $1.4 Trillion: This year looks even worse for an industry decimated by the commodities slump
- SocGen Slumps as Quarterly Profit Hurt by Securities Drop: Bank says ROE target for this year of 10% is ‘unconfirmed’
- As Zika Spreads, an Unexpected Winner in Brazil’s Mosquito War: Scandal-plagued leader Rousseff seeks unity to fight virus
In today's closer look at regional markets, we start in Asia, where equities traded broadly in negative territory amid the soft lead on Wall Street, coupled with the persistent credit risk fears adding to the risk-off sentiment. As such, the iTraxx Asia index ex Japan, an index tracking the value of CDS's in Asia, widened by 6bps to the highest level since Aug'13. The Hang Seng (-3.9%) returned from its elongated break to play catch up with the recent global equity and oil rout, consequently energy names were the notable laggard. While South Korea had also entered the fray as the Kospi (-2.5%) slipped amid the rising geopolitical tensions with North Korea after launching a satellite into space. ASX 200 (+1.0%) bucked the trend with stocks supported by a slew of strong earnings. As a reminder, Japanese markets were closed due to National Foundation Day.
Top Asian News
- Hong Kong Stocks Fall in Worst Start to Lunar New Year Since ’94: Global equity rout deepens during 3-day trading break
- Bass Says China Bank Losses May Top 400% of Subprime Crisis: Hedge fund manager says 10% asset loss would cut equity by $3.5t
- Rio Will Cut Dividend After Metals Rout Sees Profit Tumble: World’s 2nd-biggest mining co. to reduce spending by another $3b
- Billionaire’s Fund Sees India Extending Bear-Market Losses: Hedge fund awaits further 10% drop in values to turn bullish
- SBI’s Profit Growth Slows to Four-Year Low on Bad Loan Surge: Provisions for bad loans almost double in the December quarter
- North Korea to Shut Industrial Park, Freeze South Korean Assets: To expel South Korean personnel from Gaeseong complex
In Europe we have so far seen the most volatile day of what has been a very rocky 2016. Risk off sentiment is extremely apparent across asset class, with equities seeing a significant sell off so far today. Euro Stoxx 50 is lower by around 3.0% this morning, with financials and energy names the most significant underperformers as has been the case throughout the last 6 weeks. Financials have been weighed on by SocGen (-12.4%) who have suffered significantly in the wake of their earnings, while Deutsche Bank's woes have not been forgotten (-5.7%), with the iTraxx Sub Financials index widening this morning by around 36bps, suggesting a rise in financials' CDS. The heightened fear has also seen significant gains in fixed income, with Bunds higher by around 100 ticks so far today, while UK 10-year Gilt yields dropped to a record low this morning.
European Top News
- Glencore Copper Production Falls as Franco to Buy Metals Stream: 4Q zinc production fell 18%, coal declined 17%
- Zurich Insurance Quarterly Loss Misses Estimates on Claims: Company expects to miss its return-on-equity target for year
- Total’s Earnings Beat Estimates on Oil Production, Refining: Co. maintains dividend, offers payout in new stock
- Adidas Sees Higher Profit After 2015 Earnings Beat Estimates: Raises sales, profit outlook for this year
- BG Group Trades Final Time Before Merger: To delist from exchanges on Feb. 15 as Shell takes over; BG’s value has grown ninefold since company’s creation in 1997
- Mediobanca Second-Quarter Profit Declines on One-Time Charges: Fiscal 2Q profit falls 24%
- Nokia Earnings Increase on Cost Focus as Sales Fall Short: Projects 2016 “headwinds” as demand slows
- Publicis Sales Rise on Digital, North American Business: CEO Maurice Levy forecasts ‘modest’ growth this year
- Rio Will Cut Dividend After Metals Rout Sees Profit Tumble: To reduce spending by another $3 billion
- Natixis Buys Stake in U.S. Boutique as CEO Seeks Advisory Growth: To acquire 51% of Peter J. Solomon
In FX, the dominant move as noted above was the USD/JPY sell off, which has impacted on all the major currency pairs. This has contributed to the risk off theme, with stock markets in Europe in the red again and US futures pointing to a 5th consecutive day of losses. From the mid 112.00's, the spot JPY rate was slammed through the 111.00's to print 110.99, with no sign of the MoF or BoJ.
Cross/JPY rates were dragged lower, with EUR/JPY trading through the key 126.00 level, but with limited momentum through here as EUR/USD rallied to new recent highs just above 1.1350. No such tempering in GBP and AUD, though the former JPY rate held 160.00 despite a heavy turnaround in Cable. EUR/GBP posted new highs through .7850. AUD/USD losses through .7000 contributed to sub 80.00 (and 79.00) in AUD/JPY. USD/CAD has tested 1.4000, but holds off the figure as yet.
WTI and Brent crude futures have ticked lower in European trade with WTI Mar'16 futures notably breaking below the USD 27.00 level, near 12 year lows despite the headline figure released in yesterday's DoE inventories showing a surprise drawdown . However, some analysts have noted that Cushing OK crude inventories showed a surprise build, and the market is ready to pounce on any signs that the glut is expanding.
Gold has benefited from safe haven bids in Asian and European trade and is over USD 25.00/oz higher on the session, at its highest level since May 2015. The World Gold Council have noted that the upward trend in gold looks set to continue as buying by central banks and Chinese investors will bolster prices. Analysts have noted that the following year could see a surge of M&A activity, as gold miners have plenty of liquidity with surging gold prices and diversified miners look to offload assets, due to softness in industrial metals.
Turning to the day ahead, we get the latest weekly initial jobless claims data due in the US. The focus will again be on Fed Chair Yellen when she is due to speak in front of the Senate at 10am. Her prepared remarks will mirror what she said yesterday so the focus will be on the Q&A: for the sake of the market she better be much more dovish.
Bulletin Headline Summary from Bloomberg and RanSquawk
- Today has seen the most volatile day of what has been a very rocky 2016, risk off sentiment is extremely apparent across asset class
- The FX markets have been dominated by the USD/JPY sell off, which has impacted on all the major currency pairs
- Looking ahead: highlights include: Fed's Yellen appear before Senate, weekly jobs data and earnings from PepsiCo
- Treasuries higher in overnight trading as European equity markets plunge, WIT oil drops below $27 a barrel; Treasury to sell $15b U.S. 30Y notes, WI 2.465% vs 2.905% in January, lowest 30Y auction stop since 2.880% in August 2015.
- Financial markets are signaling that investors have lost faith in policy makers’ ability to support the global economy. European stocks slid toward their lowest since September 2013 and U.S. futures indicated equities will open lower
- Sweden’s central bank lowered its key interest rate even further below zero to -0.5% and said it’s prepared to use its full toolbox of measures as it battles to revive inflation and keep the krona from appreciating
- European banks and insurers’ subordinated credit risk rose to the highest since March 2013 after disappointing earnings at Societe Generale and Zurich Insurance Group renewed concerns about financial companies’ profits; Societe Generale, France’s second-largest bank by market value, posted fourth-quarter profit that missed analysts’ estimates as earnings at the investment bank dropped and it set aside provisions for potential legal costs. The shares plunged
- With populist and anti-EU forces surging across the region, should David Cameron leave next week’s European Union summit with a deal to overhaul the terms of Britain’s membership, many of his counterparts will dig out their own wishlists
- Kyle Bass, the hedge fund manager who successfully bet against mortgages during the subprime crisis, said China’s banking system may see losses of more than four times those suffered by U.S. banks during the last crisis
- The world is so awash with crude, the boss of BP Plc said people will be filling their “swimming pools” with it by the end of the year
- Sovereign 10Y bond yields mostly lower, Greece (+31bp), Portugal (+31bp) higher; European stocks plunge, Asian markets mostly closed for holiday, Hang Seng drops; U.S. equity-index futures fall. Crude oil drops, copper, gold rise
US Event Calendar
- 8:30am: Initial Jobless Claims, Feb. 6., est. 280k (prior 285k); Continuing Claims, Jan. 30, est. 2.245m (prior 2.255m)
- 8:45am: Bloomberg Feb. United States Economic Survey
- 9:45am: Bloomberg Consumer Comfort, Feb. 7 (prior 44.2)
- 1:00pm: U.S. to sell $15b 30Y bonds
- Central Banks
- 10:00am: Fed’s Yellen testifies to Senate committee
- 5:30pm: Reserve Bank of Australia’s Stevens testifies in Parliament
DB's Jim Reid concludes the overnight wrap
Looking at the latest in Asia this morning, markets in Korea and Hong Kong are open for the first time this week, although are largely playing catch up with the big falls that we’ve seen for risk assets in that time. The Hang Seng is currently down a steep -4.03% while the Kospi has dropped -2.97%. Mainland China exchanges are still closed although the Hang Seng China Enterprises Index (HSCEI) is down nearly 5%. Markets in Japan are closed for a public holiday. There’s better news in Australia where the ASX is currently +0.95%, although the Aus iTraxx index is 4bps wider as we go to print. US equity market futures are weaker while Gold has surged above $1,200.
Moving on. As we highlighted at the top, yesterday saw the 2s10s Treasury yield curve go below 100bps for first time since December 2007. After spiking as high as 1.772% in early trading, the benchmark 10y yield tumbled into the close, eventually finishing over 5bps lower on the day at 1.668% and just off the 12-month lows. 2y yields finished unchanged at 0.686% meaning the spread of 98bps is the lowest since the 6th December 2007. This is one of our favourite lead indicators of the business and default cycle and the flattening that has occurred in recent years is one of the reasons we think credit conditions have been tightening for a few quarters now and why our default models have been showing a continued pick-up in defaults into 2017-2018. To be fair the last four recessions have not started until the yield curve (2s10s) has inverted. We're still some way off that but the fact that we're at the flattest for over 8 years is a warning sign.
There was finally some good news to report for European equity markets yesterday as the Stoxx 600 (+1.87%) benefited from a financials-led (Banks +4.42%) rebound to close up for the first time this month. Having been heavily hit in recent days the IBEX (+2.73%) and FTSE MIB (+5.03%) finally got some much needed relief. European credit indices also had a better day although did finish well off their tights. The iTraxx senior and sub-financials indices ended up 5bps and 13bps tighter respectively which helped Main in particular close nearly 2.5bps tighter, although the index had been closer to 8bps tighter pre-Yellen.
Staying with credit, our US credit strategists published their latest note earlier this week (Chickens Come Home to Roost, 8 Feb 2016) wherein they construct a proprietary dataset to forecast expected US default rates. The team uses index transition data to capture all forms of default – bankruptcies, out-of-court restructurings and distressed exchanges – to build a robust market-based dataset that is more detailed, precise and timely than that available from ratings agencies. The most striking revelation of the data is that DM HY commodity names appear to already be in a full cycle, with issuer-weighted default rates at 15.9% (14.9% par).
Assuming that commodity defaults rise to 20% for the year ahead and that ex-commodity defaults hold steady at 4% as they forecast, the overall default rate for DM USD HY (Commodity weight: ~20%) would hit 7.2% - magnitudes higher than the 1.85% default rate seen last year! Rising credit pressures across a spectrum of non-commodity industries and downward pressure on recovery rates in energy bonds should only serve to further compound already apparent risks.
Wrapping up, yesterday’s economic data was focused on what was a pretty soft set of industrial production reports in Europe. Data for France (-1.6% mom vs. +0.3% expected), Italy (-0.7% mom vs. +0.3% expected) and the UK (-1.1% mom vs. -0.1% expected) all missed relative to expectations, while manufacturing reports for France and the UK were also soft for the month of December.
Turning to the day ahead, there’s not alot for us to report with no economic data of note due out in Europe and just the latest weekly initial jobless claims data due in the US this afternoon. Instead the focus will again be on Fed Chair Yellen when she is due to speak in front of the Senate at 3pm GMT. Her prepared remarks could mirror what she said yesterday so the focus will be on the Q&A. Away from this we’ll also get the Riksbank’s latest monetary policy announcement where current economist expectations are for another cut in the main policy rate deeper into negative territory (10bps cut to -0.45%). Earnings wise today we have 20 S&P 500 companies set to report including AIG and PepsiCo.
