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Market Wrap: All Eyes On Yellen Who Better Not Disappoint

While all the algos are programmed and set to scan today's FOMC statement for whether both "patient" and "considerable time" are still there (as it did last time when it supposedly sent a pseudo-hawkish message while telling Virtu and Getco to buy, buy, buy), the market is torn between the trends observed in recent days: on one hand finally succumbing to the adverse impact of USD strength, which overnight also saw the Singapore Dollar admit defeat in the ongoing currency wars, is crushing both revenues and EPS, as well as outlooks, for the bulk of US companies, even as millennials - long since given up on buying a house - allocate their meager savings to the annual incarnation of Apple's flagship product as seen in yesterday's record, blowout numbers by AAPL which is up 8% in the premarket and sending Nasdaq futures soaring compared to the stagnant DJIA or S&P. And then there is Europe where the mood is decidedly sour this morning, with Greece imploding on fears Tsipras really means business and concerns the Greek "virus" may spread to other peripheral nations whose bonds have also seen a lack of a bond bid this morning.

So will Yellen save the day again?

The problem is that at this point it is unclear just what that means: if she continues ignoring the global deflationary pressures and not relent to delaying the rate hike, then the USD will surge even more (which at this point is no longer a good thing as explained in "When A Soaring Dollar "Reflects Loss Of Investor Confidence And Is Potentially Devastating""), pressuring US exports and corporations that much more until finally something snaps and the decoupling theme so prevalent for the past 6 months is ruined.

Or will she admit that the myth of a US recovery was just that, for the 5th year in a row, and hint that all else equal, the Fed may not only keep ZIRP for longer, but even go NIRP or, once the US budget deficit grows enough to allow another full-blown debt monetization by the Fed, return to a QE regime?

We don't expect answers to all these questions, but today is certainly shaping up to be a dramatic session, one which will be that much more dramatic courtesy of the now pervasive lack of market liquidity.

Looking at markets, today’s European session saw equities open higher, with sentiment stemming from Apple (+7% pre market) posting a net profit of USD 18bln for the quarter, the largest for a public company in history and Yahoo! (+7.5% pre market) announcing plans for a tax-free sale of its remaining stake in Alibaba (BABA) into a newly formed spin-off company. However, this move was pared with little data or newsflow to sustain the sentiment, to trade in the red by the middle of the session, with Euro Stoxx down around 1%, weighed upon by Siemens who are down over 5% after two negative broker moves and volatility in Greece. This saw flows head to Bunds at the expense of equities, with the German benchmark reclaiming the 158.00 handle and T-Notes moving in tandem with its European counterpart.

Greece is still feeling the repercussions of SYRIZA’s election victory on Sunday with leader Tsipras commenting that he will aim to negotiate debt and expects radical changes, however will not target destructive conflict with creditors. This saw the GE/GR 10y spread widen by 90 bps, while the ASE is down around 7% on the day, with Greek banks the underperformers.

Looking ahead, as well the FOMC rate decision, market focus will also be on earnings today, with high profile company Facebook, QUALCOMM, Boeing and Biogen all scheduled to report.

Asian equity markets trade mixed amid a negative close on Wall Street, with sentiment lifted by stellar earnings from Apple. Consequently, the both the Hang Seng (+0.22%) and Nikkei 225 (+0.15%) pared back their initial losses, the latter further bolstered by JPY giving-up yesterday’s gains against the greenback. Elsewhere, the Shanghai Comp (-1.41%) was the session laggard falling to a 1-week low amid concerns about Umbrella Trusts after China Everbright reduced its Trust leverage ratio to no higher than 1:2:5 from next.

During the European morning, sources suggested Chinese State Regulators are restarting probes into margin trading at Chinese brokers, with probes into margin trading in China the catalyst for the sell off in the Shanghai Comp last Monday where the index closed down 7.7%.

In FX markets, AUD/USD strengthened during the Asian session, with focus particularly on the RBA's preferred measure of CPI, the CPI Trimmed Mean, which came in at 0.7% vs Exp. 0.5% (Prev. 0.4%, Rev. 0.3%). This saw an immediate 80 pip rise, with the CPI data lowering the expectation for an RBA cut. However, the move pared some of its gains during the European morning amid rumours of a report from RBA watcher Terry McCrann stating the RBA are very likely to cut rates at their meeting next week, with the article believed to be for publication on Thursday. Elsewhere, FX markets remain relatively tentative with little of note on the calendar ahead of the FOMC rate decision after European market (1900GMT).

In the commodity complex, palladium outperforms precious metals this morning as fears over further sanctions on Russia continue to underpin price action. This comes as US Treasury Secretary Lew says that they are prepared to impose further sanctions in Russia given the recent increase in tensions in East Ukraine with palladium prices sensitive to such news as Russia are the world’s largest producer.

Looking ahead, DoE US Crude Oil Inventories are the piece of tier 1 data today at 1530GMT/0930CST after yesterday’s API’s showed a build (12700k vs. Prev. 5700k).

In summary: European shares are little changed, rallying from intraday lows, as banks and travel stocks underperform and basic resources, personal & household outperform. Most European bond yields rise. Greek PM says government to negotiate debt relief, while govt questions moves to impose more sanctions on Russia. Greek 10-yr yield spread vs bunds widens to more than 1,000 basis points. Singapore dollar fell after central bank said it will seek a slower pace of appreciation against currency basket. The euro is weaker against the dollar. Japanese 10yr bond yields rise. Apple rises as much as 8% in Frankfurt trading after results. U.S. futures are little changed to higher. Goldman cuts its near-term outlook for raw materials to underweight. decline, with natural gas, WTI crude underperforming and zinc outperforming. U.S. mortgage applications, FOMC rate decision due later.

Market Wrap:

  • S&P 500 futures up 0.2% to 2032.70
  • Stoxx 600 down 0.1% to 368.3
  • US 10Yr yield down 3bps to 1.79%
  • German 10Yr yield down 2bps to 0.36%
  • MSCI Asia Pacific steady at 142.4
  • Gold spot down 0.2% to $1289.5/oz
  • Euro down 0.14% to $1.1365
  • Dollar Index up 0.05% to 94.07
  • Italian 10Yr yield up 8bps to 1.61%
  • Spanish 10Yr yield up 7bps to 1.46%
  • French 10Yr yield up 0bps to 0.58%
  • S&P GSCI Index down 0.6% to 379.9
  • Brent Futures down 0.8% to $49.2/bbl, WTI Futures down 1.7% to $45.4/bbl
  • LME 3m Copper up 0.9% to $5468/MT
  • LME 3m Nickel up 1.1% to $14960/MT
  • Wheat futures down 0.7% to 515.3 USd/bu

Bulletin Headline Summary from RanSquawk and Bloomberg

  • European equities open in the green following Apple’s impressive earnings, however the move has failed to be sustained with industrials weighing on equities as Siemens falls over 5% on negative broker moves
  • Greece is still feeling the repercussions of SYRIZA’s election victory the GE/GR 10y spread widen by 90 bps, while the ASE is down around 7% on the day, with Greek banks the underperformers.
  • The market awaits the latest FOMC announcement (1900GMT/1300CST) with focus remaining on the `considerable time` phrasing and whether the Fed will acknowledge the strong USD and its impact on growth.
  • Treasuries gain, 30Y yield trading near record low before Fed statement scheduled for 2pm in Washington; 2Y  0.502% before U.S. sells $26b at 2pm, WI yield 0.535% vs 0.703% in Dec. 2Y FRN to be sold at 11:30am.
  • Fed policy makers seen keeping “patient” language in today’s statement, according to published research and interviews with strategists
  • Greek Prime Minister Alexis Tsipras promised to avoid a “catastrophic clash” with creditors and European governments, as Greece’s stock and bond markets extended declines to lows not seen since the peak of country’s debt crisis
  • The yuan overtook Canada’s dollar to rank fifth for use in global payments, bolstering the case for the IMF to endorse it as a reserve currency
  • Bank of England’s Andrew Haldane says new normal for interest rates may be 2%-4%, BOE rate rises will be gradual when they come
  • Germany gets bids for EU1.212b vs EU2b sale goal for 30-year bonds that fall just outside eligibility for QE
  • Singapore unexpectedly eased monetary policy, sending SGD to the weakest since 2010 vs USD; MAS said in an unscheduled statement it will seek a slower pace of  appreciation against a basket of currencies
  • As Kaisa Group Holdings Ltd. seeks to avert a debt default after a member of the controlling Kwok family left, analysts are taking a closer look at Sino Life Insurance Co., its second-largest shareholder
  • Apple Inc posted a 30% jump in FY1Q revenue to $74.6b as net income rose 38% to a record $18b amid sales of larger screen iPhones and refreshed Mac computers
  • Sovereign yields mostly higher, peripheral EU surges, with Greece 10Y yield approaching 10.50%; Portugal, Spain and Italy also higher. Asian stocks mixed; European  stocks fall, U.S. equity-index futures gain. Brent, WTI and gold lower; copper gains

US Economic Calendar

  • 7:00am: MBA Mortgage Applications, Jan. 23 (prior 14.2%) Central Banks
  • 2:00pm: Fed seen maintaining overnight bank lending rate target between 0% and 0.25%
  • 3:00pm: Reserve Bank of New Zealand seen maintaining official cash rate of 3.5%
  • 11:30: U.S. to sell $15b 2Y FRN via auction delayed by winter storm
  • 1:00pm: U.S. to sell $26b in 2Y notes via auction also delayed by weather

* * *

DB's Jim Reid concludes the overnight summary

So my two days off from work have been spent moping on the sofa with my leg elevated and covered in ice. All after Saturday's bad skiing injury when I've snapped knee ligaments. A non-ideal mini break culminating in watching Liverpool lose a semi-final on the telly last night! In fact in the 90 hours since the accident I've either been in bed or the sofa. This morning I'm hobbling away from the Alps on crutches and onto a train to Paris where I'm speaking at a conference this afternoon. If you're going skiing over the rest of the season please be more careful than I've been this year!! Oh and make sure you've got insurance which fortunately I did. Getting carried off the mountain is expensive. Luckily it was in France and not Switzerland though!

One wonders how careful the Fed will be in 2015. We may get some early clues today after the conclusion of the first FOMC meeting of the year. This meeting isn’t going to see the release of the Fed’s Summary of Economic Projections, nor a press conference but nevertheless it will be interesting to see the Fed’s January statement. DB’s Peter Hooper expects that the Fed will use this meeting for some ‚necessary housekeeping? with just a few small language changes as he thinks the economic picture has changed moderately but not enough for any significant changes to be made. To sum up, Peter expects the statement to be much like December's in which the Fed’s message was that as long as the labour market continues to show improvement and they continue to project inflation returning to 2% over the next few years (as indicated in their December forecast) the lift-off for Fed rates could begin around the middle of this year. Peter takes this to mean sometime between June and September and most likely June so long as (1) core PCE inflation falls at most another tenth or so in the near term, (2) wage inflation is showing signs of rising, (3) survey measures of longer term inflation expectations are holding firm, and (4) employment and unemployment continue on their recent favourable trends. He thinks that if core inflation drops by several tenths this could push the first hike out a meeting or two.

If the Fed stick to their script then the market could be in for a small shock. Market-based measures of the first Fed hike place it at around the October meeting. This is already one meeting later than was being priced in at the start of the year. After this the second hike is priced in for around March 2016, whilst we entered the year pricing in the second hike for December 2015. So there is room here for volatility as we approach the summer FOMC meetings if the Fed’s message remains unchanged. It has long been our view that the Fed will struggle to hike as soon as it wants to given global growth and inflation issues, however there's no doubt they are keen to pull the trigger so something will have to give at some point. So any evidence either way today will be interesting.

Talking of central banks, we've seen another surprise move overnight as Singapore has eased monetary policy by reducing the slope of the policy band for the Singapore Dollar. The central bank also cut inflation forecasts for this year with expectations of a 0.5% decline in prices. The SGD is around 1% weaker versus the Dollar and at its lowest since September 2010. The MAS is now the ninth central bank to ease in January, most of which have been a surprise move. Who is next is the big question, and can the Fed continue to try to prime the market for rate hikes when the rest of the world is easing?

Taking a look at the early trading in Asia this morning, equity markets are generally firmer with the Hang Seng (+0.61%), Nikkei (+0.40%) and Kospi (+0.50%) up but the Shanghai Comp (-0.07%) weaker. The ASX is +0.10% and the AUD +0.69% stronger versus the US Dollar following better than expected core inflation data out of Australia.

Back to markets yesterday, equities took a sharp leg lower in the US yesterday following largely mixed economic data as well as generally weaker corporate earnings. Both the S&P 500 (-1.34%) and Dow (-1.65%) closed just inside their intraday lows whilst CDX IG closed 1bp wider. Earnings yesterday supported the weaker sentiment in markets. In particular releases from Caterpillar, Microsoft and Proctor and Gamble headlined disappointing quarterly releases with earnings generally below consensus. Thematically, Proctor and Gamble reported difficulties with a fluctuating FX market - the company release noting that it was the ‘most significant fiscal year currency impact’ in its history. US chemicals group Dupont also downgraded 2015 profit forecasts following a larger than expected currency impact as a result of the stronger Dollar. As well as currency impacts, lower oil prices has been the other key theme that we’ve seen come out of results so far and yesterday’s release from Caterpillar highlighted the subdued demand from oil and mining services companies in particular. It wasn’t all bad news however. After market close yesterday shares in both Apple and Yahoo rose 7% and 10% respectively in extended trading following better than expected earnings. The FT reported that Apple in particular reported the highest quarterly net profit ($18bn) on record for any company despite Apple’s CFO noting that ‘results would have been even stronger absent fierce foreign exchange volatility’.

Away from earnings yesterday, it was a busy day for data in the US. Durable goods orders (-3.4% mom vs. +0.3% expected) and core capital goods orders (-0.6% mom vs. +0.9%) for December disappointed. Our US team noted that the latter print means core orders for Q4 have fallen at an 11.4% saar rate which is much weaker than recent industrial production indicators have showed. As a result our colleagues have downgraded their Q4 real GDP forecast to 3.3% from 4.2% previously but maintain that the advance estimate will likely be revised higher as top-down indicators indicate stronger growth. Elsewhere new home sales (481k vs. 450k expected) surprised to the upside whilst the January consumer confidence was particularly strong at 102.9 – ahead of expectations of 95.5 and nearly 10 points up from December’s reading. The reading was the highest since August 2007 and no doubt boosted by lower gasoline prices and an improving labour market. Finally the Case-Shiller home price index was in line at +0.8% mom whilst the preliminary services PMI ticked up a notch to 54.0 (from 53.3 previously). Treasuries were volatile over the course of trading. Having opened at 1.824%, the 10y benchmark hit an intraday low of 1.746% before paring back all of those gains to close unchanged.

There was similar weakness in Europe yesterday with the Stoxx 600 finishing -0.99% and the Dax -1.57%. Crossover also closed 11bps wider. Greek equities (-3.69%) ended weaker for the second successive day since Sunday’s election with banks (-11.61%) in particular leading the declines with continued uncertainties over deposits and potential further ELA access required. Greek 3y and 10y yields closed +199bps and +38bps wider respectively. In terms of the latest updates, Tsipras announced his new cabinet yesterday including naming Yanis Varoufakis as the new finance minister. As per Reuters the new government has, as expected, halted the privatization of Greece’s biggest port yesterday which had previously been agreed under its bailout agreement to China’s Cosco Group and four other potential suitors.

It was perhaps unsurprising to see comments from Germany’s Merkel yesterday quoted on Bloomberg saying that the debate about a Greek debt cut is astonishing and that the new government has to make clear whether it’s committed to terms of the EU aid programme, specifically saying that the ball is in Greece’s court. Interestingly another article on Bloomberg reported that the new Syriza-led coalition issued a statement opposing EU sanctions for Russia over the conflict in the Ukraine. According to the report, the Greek government was reported as saying that ‘Greece doesn’t consent’ and that the announcement violated ‘proper procedure’ by not securing Greek support. Interestingly Greece’s new foreign minister Kotzias has the opportunity to block further sanctions on Russia tomorrow at an EU meeting given that sanctions require a unanimous consensus from all 28 governments. It’ll be interesting to see the developments between now and then but the meeting could provide early signs into the near term approach Greece takes to dealing with the wider Euro-area, and vice-versa.

Away from Greece it was a quiet day elsewhere in Europe with just UK Q4 GDP, which came in a touch lower than expected (+2.7% yoy vs. +2.8% expected). 10y Gilts finished 3bps lower at 1.483% and Bunds were relatively unchanged at 0.383%. Peripheral yields however were anywhere from 2-7bps wider. The Euro closed 1.27% firmer versus the Dollar at $1.138.

In terms of the day ahead, its a relatively quiet day in Europe this morning with just the German import price index and consumer confidence for the region as well as in France. In the US this afternoon with little in the way of data, focus will likely just be on the aforementioned FOMC.