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Futures Euphoria Deflated By Latest Batch Of Ugly European News: Germany Can't Exclude "Technical Recession"

So far the overnight session has been a mirror image of Monday's, when futures languished at the lows only to ramp higher as soon as Europe started BTFD. Today, on the other hand, we had a rather amusing surge in the AUDJPY as several central banks were getting "liquidity rebates" from the CME to push the global carry-fueled risk complex higher, only to see their efforts crash and burn as Europe's key economic events hit. First, it was the Eurozone Industrial Production, which confirmed that the triple dip is well and here, when it printed -1.8%, below the expected -1.6%, and far below last month's 1.0%. This comes in the month when German IP plunged most since 2009, confirming that this time it's different, and it is Germany that is leading Europe's collapse into the Keynesian abyss not the periphery. And speaking of Germany, at the same time Europe's former growth dynamo released an October ZEW survey of -3.6%, the 10th consecutive decline and well below the 0.0% expected: first negative print since late 2012!

Just as bad,the ZEW current condition print of 3.2, is once again below the 10 year average as Bloomberg notes:

The cherry on top was Zew's Fuest saying he "can't exclude a technical recession in Germany" which in turn led to another record low in Bund yields, a slide in the Dax to fresh 1 year lows, and a break in the carry-trading central banks' concentration asthe US futures ramps was almost entirely undone. 

In other news, Greek bonds are blowing out to levels not seen since May, crossing 7%, on the previously noted concerns the European Court of Justice could further defang the OMT, in the process unwinding 2 years of "whatever it takes"iness.

Finally, with earnings season now well underway, the first company to report today did so with a whimper when JP Morgan pre-released numbers, showing a miss on EPS (USD 1.36 vs. Exp. USD 1.39), even thought non-GAAP (yes, non-GAAP) revenues fared better than expected.

In Asia, besides the Nikkei (-1.5%), key indices in Hong Kong, Korea and Australia are +0.6%, +0.3%, and +1.0%, seemingly unaware that Europe would defeceate the bed once again. The bid for Treasuries remains firm with the 10yr yield down another 7bp to 2.21% in Tokyo. In Hong Kong, police have stepped up their effort to reopen the roads overnight by tearing down barricades and tents and have been met with no resistance. Elsewhere, the Asia iTraxx is 2bp wider wrapped around 121bp. The Dollar is weaker against key currencies and that is not helping the further slide in Brent either.

After yesterday's sharp sell-off in US equities, it’s no surprise to see European cash markets also in the red, as a spate of poor earnings updates from SAB Miller, Burberry and Michael Page hit sentiment. US focus shifts to the slew of earnings releases today. Other large-cap earnings releases today include Johnson & Johnson with many on the street looking for the company to beat expectations due to performance in key drugs, with sales of Remicade expected at USD 1.72bln, Olysio at USD 768.8mln and Zytiga at USD 588.3mln.

In summary: futures are trying to get some carry currency to lift them higher even as the 10Year is printing at the unthinkable at the beginning of the year 2.21%, while the 30Year is solidly back under 3%, at a whopping 2.96%. Must be the recovery and great rotation everyone was talking about...

Bulletin headline summary from RanSquawk and Bloomberg:

  • Very poor German and UK data prompts sharp strength in core fixed income, with spill-over buying in T-notes setting up US 10yr yields to test Jun’13 lows at 2.13%
  • US equity futures signal another day of losses after the S&P 500 cemented the worst three-day performance in three years yesterday, lifting the VIX index to Jun’12 highs
  • Near-term focus shifts to earnings from Wells Fargo, Citigroup, Johnson & Johnson after JP Morgan released earnings early: EPS USD 1.36 vs. Exp. USD 1.39, Rev. USD 25.2bln vs. Exp. USD 24.3bln
  • Treasuries gain, 10Y yield touches lowest since June 2013 as global sell-off in stocks continues amid weak eco data, growth concerns.
  • German investor confidence fell to the weakest in almost two years, with the ZEW index falling to -3.6 in October from6.9 in September, the 10th month of declines and first negative reading since November 2012
  • U.K. inflation fell to 1.2% in September from 1.5% in August, more than economists forecast and the lowest since September 2009
  • The Court of Justice, the EU’s highest court, will weigh whether Draghi’s ECB overstepped its powers in 2012 with the mechanism to buy the debt of stressed countries if needed
  • Traders are facing new global rules on how they determine the value of collateral in repo transactions as regulators seek to prevent panic writedowns that are seen fueling future financial crises
  • Too big to fail is likely to prove a costly epithet for the world’s biggest banks as regulators demand they increase debt securities to cover losses should they collapse; the shortfall facing lenders from JPM to HSBC could be as much as $870b, according to estimates from AllianceBernstein Ltd
  • Obama will try to shore up a coalition against Islamic State forces today as airstrikes have failed to stop Islamic State forces from gaining territory in Iraq and Syria and as questions grow about a plan that lacks effective ground forces
  • As the Ebola virus spreads in and beyond Africa, it’s raising the possibility of a global pandemic that U.S. intelligence agencies have warned is among the greatest potential threats to global security
  • Hong Kong police used chain saws and sledgehammers to clear barricades in the city’s business district erected by pro-democracy demonstrators, hours after Chief Executive Leung Chun-ying signaled he’s losing patience with the protests
  • JPMorgan swung to a third-quarter profit from a year-earlier loss, while setting aside $1b for legal expenses
  • Sovereign yields mostly lower; Greece 10Y surges by 37bps. Asian stocks lower, Nikket falls 2.3%; European stocks slide, U.S. equity-index futures higher. WTI crude and gold lower, copper higher

US Event Calendar

  • 8:30am: NFIB Small Business Optimism, Sept., est. 95.8 (prior 96.1)
  • 11:00am POMO: Fed to purchase $850m-$1.05b in 2036-2044 sector
  • 11:30am: U.S. to sell $24b 3M bills, $27b 6M bills

FIXED INCOME

The German curve flattened aggressively in reaction to a particularly poor ZEW survey (-3.6 vs. Exp. 0.0), with the index falling into negative territory for the first time since late 2012 as the data records the 10th consecutive decline. As such, Dec-14 Bund futures tripped stops on the way through contract highs of 150.78 to push Germany's borrowing costs to record lows once more. The Gilt curve has steepened, with 2s/30s steeper by 3.8bps in an effort to delay pricing of a rate hike from the BoE after a 5yr low UK CPI reading (1.2% vs. Exp. 1.4%). The SONIA-market has also taken note, pricing in the next 25bps rate hike from the MPC in eight months’ time, as opposed to six-months’ pre-data.

EQUITIES

After yesterday's sharp sell-off in US equities, it’s no surprise to see European cash markets also in the red, as a spate of poor earnings updates from SAB Miller, Burberry and Michael Page hit sentiment. US focus shifts to the slew of earnings releases today - JP Morgan have gotten things off to a poor start, after pre-releasing their numbers, showing a miss on EPS (USD 1.36 vs. Exp. USD 1.39), however revenues fared better than expected (USD 25.2bln vs. Exp. USD 24.3bln). Other large-cap earnings releases today include Johnson & Johnson with many on the street looking for the company to beat expectations due to performance in key drugs, with sales of Remicade expected at USD 1.72bln, Olysio at USD 768.8mln and Zytiga at USD 588.3mln.

FX

EUR/USD fell following the miss on Germany’s ZEW survey, also hitting EUR/JPY, which fell to 11-month lows. EUR/GBP has found resistance at the 100DMA of 0.7957 after the UK CPI, however the subsequent German data pulled the cross lower. The one major currency underperforming the EUR is GBP today, as UK CPI collapsed to 5-year lows, as falls in the cost of transport, recreation and hotels kept CPI flat over September, suggesting a broader fall in inflationary pressure independent to the slump in commodities prices. AUD outperformed its peers overnight, underpinned by the PBoC lowering its Repo rate for the 2nd time in less than a month spurring more easing hopes. This was twinned with the sharpest rise in the benchmark Chinese iron ore price in two years.

COMMODITIES

WTI and Brent crude futures saw little reprieve overnight, with a brief spell of upside being erased by a bout of USD strength after poor German and UK data. The USD-strength has also knocked precious metals lower in tandem, with industrial metals the only strong sector of commodities. Copper futures trade close to monthly highs after China’s benchmark iron ore price rallied at the fastest rate in two years overnight as traders eyed China’s trade balance data earlier in the week, which shows the country’s steelmakers ramping up output and re-stocking after the Golden Week holiday. Elsewhere, energy traders remain focused on the Islamic State’s progress toward Baghdad in central Iraq, with 180,000 citizens being forced to flee Western Iraq in response.

* * *

DB's Jim Reid concludes the overnight recap

Even though the US session was thin due to Columbus Day, we had another nasty close with the S&P 500 (-1.65%), falling from flat in the last 2 hours. The third successive day of losses puts the index firmly below its 200-day moving average – a level that is closely watched by market technicians. It was also a negative session for the Dow (-1.35%) which posted its steepest 3-day decline (-3.96%) since 2011. There weren’t any specific drivers behind the move so sentiment was likely weighed again by uncertainties around global growth (or the lack of it) and how life will look like without the Fed’s QE. For equities the Energy sector (-2.85%) was the biggest drag to the S&P 500 on the back of continued falls in Oil. Brent slumped another 1.5% yesterday, not helped by reports that the Saudis have no plans to cut back production as they seem comfortable with lower for longer oil prices. The S&P 500 Energy index and Brent are now around 19% and 22% below their respective highs in June.

We haven’t seen a four-day loss for the S&P 500 so far in 2014 so the bulls will be hoping for a good set of earnings today as the season starts in earnest. Indeed JPMorgan will kick off the US banks’ Q3 earnings season at midday UKT, followed by Wells Fargo and Citigroup (both at 1pm UKT). Overall DB’s US banks analyst, Matt O’Connor, expects most banks to meet/beat Q3 estimates on continued better-than-expected credit trends as well as upside from fixed income trading (for capital markets banks). Outlook commentaries from bank executives will be key as usual but better FIC trading (mostly driven by FX trading) and weaker net interest income (with narrowing commercial loan spreads) are likely the two biggest themes for Q3 and potentially beyond. We also have some non-financials such as Johnson & Johnson and Intel (after-market) today but the spotlight will be on the banks.

We’ll also see if the firmer Asian risk tone overnight will set the pace for the rest of the day ahead. Besides the Nikkei (-1.5%), key indices in Hong Kong, Korea and Australia are +0.6%, +0.3%, and +1.0% higher as we type. The S&P 500 Futures are also up +0.5% although the bid for Treasuries remains firm with the 10yr yield down another 3bp to 2.25% in Tokyo. In Hong Kong, police have stepped up their effort to reopen the roads overnight by tearing down barricades and tents and have been met with no resistance. Elsewhere, the Asia iTraxx is 2bp wider wrapped around 121bp. The Dollar is weaker against key currencies and that is not helping the further slide in Brent either.

Looking ahead to today, the European Court of Justice (ECJ) will hold a hearing on the ECB’s OMT programme. This comes after the German Constitutional Court in February passed the case against the OMT (along with a list of specific questions on legality) onto the ECJ thus pausing their own proceedings. As our European economics team wrote in this past week’s Focus Europe, the hearing will be “an official exchange of views between the plaintiffs and the ECB. Neither the statements nor the hearing will be public.” Whilst the hearing will be held today, in terms of a time frame for an answer our economics team noted that, ”there will be no judgement, and similar proceedings have taken up to 15 months on average in the past,” although the actual time frame for this case could be significantly different. This case is important as it will affect the legal ability of the ECB to bring in future QE. Looking ahead our economists expect that, “it is quite likely that the ECJ and subsequently the GCC will come to a favourable ruling on the subject of OMT. However, proceedings and timeline are still unclear. They expect economic conditions to force the ECB into public QE within the next 6 months. However the market perception of the efficacy and durability of the public QE may be weakened if the final judgement on OMT is still outstanding.”

As far as data flow is concerned, the German ZEW survey for October usually gets some market attention. Today will also see the release of some inflation numbers from the UK, France, Italy and Spain. These could be quite important numbers given recent trends.