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Euro Crash Continues Sending Stocks Higher, Yields To Record Lows; Crude Stabilizes On New King's Comments

Today's market action is largely a continuation of the QE relief rally, where - at least for the time being - the market bought the rumor for over 2 years and is desperate to show it can aslo buy the news. As a result, the European multiple-expansion based stock ramp has resumed with the Eurostoxx advancing for a 7th day to extend their highest level since Dec. 2007. As we showed yesterday, none of the equity action in Europe is based on fundamentals, but is the result of multiple expansion, with the PE on European equities now approaching 20x, a surge of nearly 70% in the past 2 years.

But the real story is not in equities but in bonds where the perfectly expected frontrunning, as well as backrunning, of some €800 billion in European debt issuance over the next year, taking more than 100% of European net supply, has hit new record levels just as forecast:


The rush into risk is further facilitates by the crashing Euro which has just tumbled below 1.12 , the lowest level in 11 years, and is now sure to lead to major FX losses for US multinationals, as well as a collapse in Chinese exports, further intensifying the global deflationary wave.

Perhaps just as notable is that following yesterday's expected, but still surprising, announcement of 91-year-old King Abdullah's death, which sent Brent briefly higher, the crude complex has come back down to earth after his successor, Prince Salman, said he would maintain policies on oil. To think: just 6 months ago the Saudi news would have likley sent the oil complex limit up...

Over in Asia, stock markets rose across the board following suit from sharp rallies across the globe after the ECB’s larger-than-expected QE announcement. The Nikkei 225 (+1.05%) traded close to 1-month high although unable to finish around best levels weighed by a modest JPY rebound. Shanghai Comp (+0.25%) and Hang Seng (+1.3%) were further bolstered by a better than Exp. Chinese HSBC Flash Mfg. PMI (49.8 vs. Exp. 49.5 (Prev. 49.6), despite the number showing the 2nd consecutive month of contraction.

As noted above, European equities (Eurostoxx50 +1.43) reside firmly in the green in a continuation of yesterday’s gains following the larger than expected ECB quantitative easing programme which is providing support for the DAX, currently trading near record highs. However, Italian banks remain under pressure weighing on the FTSE MIB following news today that the Populari banks' lobby will oppose new legislation imposing change into joint-stock companies. In Fixed income, the unveiling of the sovereign bond programme has led to Eurozone bond yields continuing to print fresh record lows with the bund future up 87 ticks heading into the North American session, with T-notes up 19 ticks in sympathy with the move. Of note, the Prelim Barclays month end extensions for US Treasury is at +0.09y (Prev. +0.09yrs).

European risk got a modest tailwind from today's flash PMI report, which was fractionally better than expected, with the manufacturing PMI rising to 51.0 from 50.6, the highest in 6 months. Goldman explains: "The Euro area composite PMI rose from 51.4 to 52.2 in January, more than our and consensus expectations of a smaller increase (Cons: 51.7, GS: 51.6). The expansion in the composite PMI was driven by a 0.7pt increase in the services component to 52.3 and by a 0.4pt rise in the manufacturing component to 51.0. The German composite PMI continued to rise, by 0.6pt to 52.6, while the French composite PMI fell back by 0.2pt to stand at 49.5.

In addition to the Euro area aggregate PMI, Flash PMIs were released for Germany and France. The German composite PMI came in stronger than expected at 52.6 in January (Cons: 52.4). The 0.6pt increase in the services PMI (to 52.7) more than offset the 0.2pt contraction in the manufacturing component. The German composite PMI has been volatile in the past year and declined during 2014 as a whole but, in the past three months it has displayed positive momentum. By contrast, the French composite PMI declined by 0.2pt to 49.5, against consensus expectations of a small increase (Cons: 50.1). While the French manufacturing PMI expanded by a notable 2.0pt (to 49.5), the French services PMI lost 1.1pt (to 49.5). The French manufacturing PMI has been below the 50 mark for 9 consecutive months, pointing to lingering weaknesses.


As also noted previously, WTI (+1.2%) and Brent crude (+1.9%) futures traded higher overnight following news of the death of King Abdullah, who was an advocate for lower prices. However, oil prices have since pulled away from best levels throughout the morning due to reports that his successor Prince Salman would maintain policies on oil. Elsewhere, copper (-1.8%) prices fell after speculation over aggressive Chinese hedge fund selling and China’s second contractionary PMI reading also weighing on the base metal.

Finally, and most importantly in a world in which just central banks, and the occasional robot, are left trading FX with each other, EUR/USD extended on its decline following yesterday’s news of the ECB’s larger than expected QE programme, which caused the pair to breach 1.1300 to hit Sep. 2003 lows. The weaker EUR has also weighed on EUR/CHF as it descended to its lowest level in 12 years and lifted the USD-index (+0.6%) which is trading around 11yr highs. Moreover, in response to the weaker EUR, analysts this morning have been hypothesizing that the SNB could well cut rates again in the near-term in a similar fashion to the Danish cut yesterday. Analysts at IFR further state that the front month EuroSwiss interest rate futures are almost fully priced for a 50bps cut.

In terms of the day ahead, focus this morning will be the manufacturing and services PMI’s for the Euro-area as well as regionally in Germany and France. We are also expecting business and manufacturing confidence in the latter as well as December retail sales out of the UK where consensus is for an energy related decline in the headline (-0.7% mom from 1.7% previously). The Chicago Fed national activity index will be the notable read out of the US but we suspect focus will still be on how much follow through we will get from markets on the back of the ECB action yesterday.

In Summary: European shares stay higher, advancing for a 7th day to extend their highest level since Dec. 2007. Currently close to intraday highs, with the food & beverage and autos sectors outperforming and basic resources, oil & gas underperforming. Euro weakens to 11-year low against dollar, heading for a sixth weekly decline before the Greek vote on Sunday. European bond yields fall to records. Crude oil gains after the death of Saudi Arabia’s King Abdullah, with half- brother Salman named as his successor.  Euro-area composite PMI data above estimates. German January manufacturing PMI, French services PMI below estimates, French manufacturing PMI above. U.K. retail sales above expectations. The French and German markets are the best-performing larger bourses, U.K. the worst. Commodities gain, with nickel, zinc underperforming and natural gas outperforming. U.S. manufacturing PMI, Chicago Fed index, existing home sales, leading index due later.

Market Wrap

  • S&P 500 futures up 0% to 2056.5
  • Stoxx 600 up 1.4% to 369
  • US 10Yr yield down 6bps to 1.81%
  • German 10Yr yield down 8bps to 0.37%
  • MSCI Asia Pacific up 0.9% to 140.9
  • Gold spot down 0.6% to $1294.1/oz
  • Euro down 1.15% to $1.1235
  • Dollar Index up 0.85% to 94.87
  • Italian 10Yr yield down 10bps to 1.45%
  • Spanish 10Yr yield down 11bps to 1.3%
  • French 10Yr yield down 9bps to 0.53%
  • S&P GSCI Index up 0.7% to 384.4
  • Brent Futures up 2% to $49.5/bbl, WTI Futures up 1.4% to $47/bbl
  • LME 3m Copper down 1% to $5610.5/MT
  • LME 3m Nickel down 1.8% to $14590/MT
  • Wheat futures down 0.6% to 530.5 USd/bu

Bulletin headline summary from RanSquawk and Bloomberg

  • EUR/USD (-130 pips) underperforms its neighbouring pairs in a continuation of yesterday’s downward trend to reach Sep. 2003 lows in the wake of the ECB QE announcement. In addition European yields continue to tumble lifting T-notes (+19 ticks) in sympathy with the move higher in bund futures (+89 ticks)
  • The death of Saudi Arabia’s King Abdullah lifts WTI and Brent crude overnight, however gains have been capped as his successor Prince Salman has said he would maintain policies on oil
  • Looking ahead, sees US Manufacturing PMI, Existing Home Sales, Leading Index and earnings from General Electric and McDonalds
  • Treasuries gain led by long end as Europe’s bonds surge after ECB pledge to buy the currency bloc’s sovereigns; German 10Y yield falls to new record low, Italy 10Y yield fell below 1.5% for first time on record.
  • ECB’s  asset-purchase program will continue past September 2016 if it hasn’t met its inflation objectives by then, Governing Council member Ignazio Visco said
  • Bank of Japan Governor Kuroda said that central bankers around the world have no shortage of tools to address deflation risks and that in Japan policy makers may need to look at fresh options if further stimulus is needed
  • Denmark’s  central bank signaled it is ready to step up currency interventions and continue cutting rates to stamp out any lingering speculation it may be unable to defend its euro peg
  • The fight for power in Greece enters its final hours, with Prime Minister Antonis Samaras making a last-ditch appeal to voters as he tries to defy opinion polls showing a victory for his anti-austerity opponent
  • ECB set limits on accessing its bond-buying program that will exclude Greece for at least six months, raising pressure on whichever party wins Jan. 25 elections to heed the demands of official creditors
  • China preliminary PMI from from HSBC Holdings Plc and Markit Economics was at 49.8 in January, exceeding the median estimate of 49.5 in a Bloomberg survey and up from December’s 49.6
  • U.K. retail sales unexpectedly increased in December led by sales of food, computers and auto fuel as the plunge in oil prices boosted Britons’ spending power
  • Salman Bin Abdulaziz Al Saud ascended to the throne of Saudi Arabia after the death of his half-brother King Abdullah, taking the helm of the biggest Arab economy amid political turmoil in the Middle East and tumbling oil prices
  • Sovereign yields fall, led bu EU periphery with Greece 10Y -42bps, Portugal -22bps, Italy and Spain each lower by ~10bps. Asian, European stocks surge, U.S. equity-index futures steady. Brent and WTI rise; copper and gold fall

US Event Calendar

  • 8:30am: Chicago Fed Nat Activity Index, Dec., est. 0.48 (prior 0.73)
  • 9:45am: Markit US Manufacturing PMI, Jan preliminary, est. 54 (prior 53.9)
  • 10:00am:  Existing Home Sales, Dec., est. 5.08m (prior 4.93m)
  • Existing Home Sales m/m, Dec., est. 3% (prior -6.1%)
  • 10:00am: Leading Index, Dec., est. 0.4% (prior 0.6%)

* * *

DB's Jim Reid Concludes the overnight recap

To use our 2015 analogy, yesterday saw the plates spun very hard and it will be difficult to stand in the way of its impact. Yesterday’s program was at the same time bigger, faster and more explicit than what had been promised before and what the market had come to expect. The ECB announced an expansion of its purchase program so that now the ECB will be buying €60bn of assets a month including the current ABS and covered bond programs and the new purchase program for “euro-denominated investment-grade securities issued by euro area governments and agencies and European institutions”. The program looks set to carry on until the end of September 2016 at least. This alone will expand the ECB balance sheet by about €1.1tr and our European economist’s Mark Wall and Marco Stringa think this will be made up of around €700-800bn of euro government bond purchases.

More specifically on the duration of the plan, the statement went on to say that these purchases, “are intended to be carried out until end-September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term." This was "whatever it takes" in everything but name. To our eye this implies that if inflation continues to run below target with few signs of it sustainably rebounding back the ECB will continue purchasing beyond next September. While they of course could end it early if inflation picks up it’s interesting to highlight that even after 6 years of on-and-off QE programs in the US, core inflation there has (with only a brief period in 2012) continued to run notably below its 2% target. As our economist’s wrote, “this means the ECB have rotated from an intention to expand the balance sheet by up to EUR 1 trillion to a position of EUR 1 trillion at least, particularly if the TLTRO turns out to be a source of balance sheet expansion.” As we wrote in yesterday's EMR, at present it is hard to see the date at which ECB QE ends so this program could end up exceeding all previous forecasts by a large amount. For more detail on the specifics of the program you can read their note here:

With the ECB now committed to a large and sustained QE program we continue to believe that this will be a good environment for European equities and European credit whether you like the fundamentals or not or whether you think it makes any difference to the economy longer-term. Indeed if you believe a lack of structural reform, increasing inequality and low fiscal injections are holding back growth then yesterday's announcement hardly changes the long-term picture. Indeed it could even prevent improvements here. We continue to think Oil, the Fed and Greece will cause early year volatility but we continue to expect European assets to out-perform. They aren't going to be buying IG credit (after much speculation over the last few months) but this shouldn't prevent the asset class from benefiting from the liquidity.

The immediate price action post the ECB decision was one where we saw further weakness in the euro but clear outperformance in European equity and bond markets. We'll recap these in a little more detail below but Asian risk markets have largely followed suit with a firmer bias overnight. The Nikkei, Hang Seng, Shanghai Composite and the ASX 200 are up +1.00%, +1.35%, +1.78% and +1.51%, respectively. The Euro is hovering at around 1.132 against the Dollar, Gold is easing off a little at just below $1300/oz while the 10yr UST yield is a tad lower from the US close at around 1.858% as we go to print. The positive tone is also driving Asian credit spreads tighter overnight with the Asia and Australian iTraxx indices 4bps and 3bps tighter, respectively. Meanwhile oil markets have rallied some 1.5% overnight possibly on the news that King Abdullah of Saudi Arabia has died with his half brother succeeding him as King. The HSBC flash manufacturing PMI for China came in sub-50 for the second consecutive month (49.8 v 49.5 expected) but the impending glut of central bank liquidity is perhaps overriding any fundamental concerns for now. On the corporate news front, Hutchison Whampoa has entered into exclusive talks with Telefonica for an indicative cash price of £9.25bn and deferred upside interest payments to a further £1bn. The deal has been reported by the media for sometime but looks like a deal completion is not expected until mid-2016 (Bloomberg).

Recapping the European price action yesterday the Stoxx 600 closed +1.66% higher having been relatively subdued in the build up to the announcement. Elsewhere the DAX (+1.32%), CAC (+1.52%), FTSE MIB (+2.44%) and IBEX (+1.70%) all closed stronger. The Stoxx has now risen for six consecutive days and rallied nearly 8% off the levels from two weeks ago. Credit markets also firmed. Crossover closed 11bps tighter and is now 60bps off the wides earlier this month. Meanwhile the Euro dropped to a fresh 11-year low versus the Dollar, finishing 2.1% lower at $1.137 having touched intraday lows of $1.132. Having initially traded weaker in the morning, bonds rallied across the Euro-area. Benchmark 10y Bunds closed nearly 8bps tighter whilst 10y yields in France (-8.7bps), Spain (-12.6bps) and Italy (-14.2bps) struck fresh record lows at 0.617%, 1.404% and 1.549% respectively - although in reality the majority of government bonds are trading at or near record lows now.

US risk assets fed off the better tone. Indeed, both the S&P 500 (+1.53%) and Dow (+1.48%) closed firmer with the former now moving back into positive territory for 2015 (+0.21%). This was despite what was generally a mixed set of economic data prints. Jobless claims dropped 10k to 307k but this raised the four-week average to 307k - the highest reading since June last year. However our US colleagues point out that nonfarm payrolls still grew 267k that month suggesting that a relatively elevated reading on the moving average is not necessarily a signal of a slowing labour market. Elsewhere, the FHFA house price index rose to +0.8% mom (from 0.6%) and ahead of expectations of 0.3%. The Kansas City Fed manufacturing index disappointed however (3 vs. 8 expected). Treasuries were volatile. 10y yields are one point hit an intraday high of 1.947% before falling to 1.809% immediately post the announcement. They eventually settled back more or less where they started the day at 1.86%. With much of the focus on ECB, further falls in oil markets went largely unnoticed. Indeed both WTI (-3.08%) and Brent (-1.04%) dropped to $46.31/bbl and $48.52/bbl respectively.

With the ECB decision out of the way, attention will now move to Greece this Sunday where we should have an indication of the election results by 10pm GMT. Yesterday’s decision was a boost for Greek assets. Sub-investment grade Sovereigns will be included in the ECB plan although we note these will have to be under a programme. The main caveat centers around the 33% issuer limit which means that the ECB will not be able to purchase Greek bonds before July given the volume of Greek bonds held in the SMP. Recent opinion polls have pointed towards further support for Syriza with the lead widening anywhere from 3% to 4-6% depending on the poll. Perhaps of more interest is what yesterday’s decision would mean for a Syriza outright win in terms of dealing with the Troika and whether or not this makes the negotiation process easier? The Eurogroup meeting next week could well offer some clues into the near term outlook for Greece. 10y Greek yields closed some 50bps tighter yesterday whilst Greek equities (+1.14%) halted two days of previous declines.

In terms of the day ahead, focus this morning will be the manufacturing and services PMI’s for the Euro-area as well as regionally in Germany and France. We are also expecting business and manufacturing confidence in the latter as well as December retail sales out of the UK where consensus is for an energy related decline in the headline (-0.7% mom from 1.7% previously). The Chicago Fed national activity index will be the notable read out of the US but we suspect focus will still be on how much follow through we will get from markets on the back of the ECB action yesterday.