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Futures Fail To Rebound Despite Another Overnight Slam Of Global Bad News

And it all started off so promisingly, when after the biggest selloff in US stocks in two months, the BOJ and its preferred banks once again sold 6J (i.e., bought USDJPY) in the morning Japan session (while collecting CME liquidity rebates of course), sending the pair from below 108 to half the way to 109, and naturally taking global futures higher while pushing yields lower when as ITC says a "large TY seller knocked USTs to lows during the session" - hmmm, wonder who the large seller was. And then... the "rebound euphoria" fizzled a la Sodastream, sending the Nikkei sliding 1.2%, and US equity futures back to unchanged with the bond surge returning and sending German Bunds to new all time highs once again, while the Dax briefly broke below under 9000 before stabilizing at the key support level. It is unclear what caused the failure in central bank euphoria, although some suggest that the latest bevy of disappointing economic news wasn't quite bad enough.

Among these:

  • China Service PMI 53.5, down from 54.1 in August
  • China Composite PMI 52.3, down from 52.8 in August

And then there was Spain where housing transactions fell -1.1% from a year ago (remember all those Spanish housing rebound stories?), while Industrial Output rose just 0.6% below the 0.9% expected, suggesting not only that the core European weakness has spread to the periphery but that Spain's constant and relentless revisions of terms until they get it "just right" is also failing. Add the threat of an Ebola panic shutting down the economy if only for a few weeks, and suddenly bets that were off about Europe are suddenly really off. Still, we are confident that Spain's next GDP definition "excluding the impact of Ebola" will show substantial 3%+ growth.

Not much else has happened: Asian markets are lower overnight with the Nikkei down -1.4% and the Hang Seng down -0.7% as we type. Credit is also struggling with iTraxx Asia trading +2bps wider.

European equity futures sit close to yesterday's lows, with the 9,000 level holding in the DAX future, which has now fallen over 10% from July's peak of 10,044. Italy remains somewhat buoyed by strong Fiat shares (+1.4%) as the company outline their M&A plans to become one of the world's number 1 automakers. The IT sector is the worst performer in Europe, as IT stocks are hit by Infosys’ Indian listing falling as much as 5% on the back of a downgrade from Citigroup, allied with fears that German giant SAP could be forced to pre-release their results due later in the month.

Looking to the day ahead, in Europe we have Spanish August Industrial Output (expected at +0.9% YoY), whilst in the US the main data point will be the release of the Fed’s September meeting minutes. Also we have Alcoa unofficially kicking off earnings season.

Bulletin Headline Summary from Bloomberg and RanSquawk

  • Softer global stocks bid core fixed income markets above yesterday’s highs, pressing the German 10yr yield – once again – to all time lows
  • WTI crude futures trade at the lowest level in 18 months as last night’s API crude inventories registered the largest build since April
  • Looking ahead, focus turns to the FOMC minutes, with markets awaiting the details of the conversation that led the Fed to retaining their 'considerable period of time' phrasing in the most recent policy statement.

ASIA

As a result of the growing global growth concerns, the Nikkei
225 closed down 1.2% with all its ten sectors firmly in the red, after
touching its lowest level since September 2nd. Elsewhere, the Shanghai
Comp (+0.3%) hit a 19-month high following the Golden Week Holiday as
property stocks rallied on an easing of real-estate curbs, shrugging off
a weaker Chinese HSBC Services PMI at 53.5 (Prev. 54.1).

FIXED INCOME

Alongside the softer stocks open, Bund futures topped contract highs,
hitting 150.43 helping lift T-notes back into positive territory after
suffering from profit-taking in Asia-Pacific trade. Gilt futures
outperform, with the 2s/30s curve flatter by 2bps as the BRC Shop Index
indicates still languishing inflation in the UK. The Greek/German 10yr
yield spread is the poorest performer of the day as markets continue to
eschew risk ahead of tomorrow’s Greek government confidence vote, with
the worst-case scenario being the calling of snap elections in Greece.

EQUITIES

European equity futures sit close to yesterday's lows, with the
9,000 level holding in the DAX future, which has now fallen over 10%
from July's peak of 10,044. Italy remains somewhat buoyed by strong Fiat
shares (+1.4%) as the company outline their M&A plans to become one
of the world's number 1 automakers. The IT sector is the worst
performer in Europe, as IT stocks are hit by Infosys’ Indian listing
falling as much as 5% on the back of a downgrade from Citigroup, allied
with fears that German giant SAP could be forced to pre-release their
results due later in the month.

FX

AUD initially slid to lows of 0.8752 after the Australian Statistics Bureau revised their August and July Employment numbers sharply lower, raising fears that tonight's jobs numbers could be soft. However, the AUD/USD pair has recovered to trade flat, as over-riding selling in USD/JPY (led by large leveraged funds) weakens the USD from overnight highs. GBP trades softer against most others, after forecasting from the Halifax Housing Survey dampened sentiment, stating that house prices have peaked and will probably ease later this year as demand wanes.

COMMODITIES

WTI and Brent crude futures both trade lower after yesterday’s API crude oil inventories showed a significant build of 5.1mln bbls, much larger than the expected build of 2mln bbls in today’s DoE crude inventories. Gold and silver both trades strongly, as the softening USD and dwindling global stocks helped buoy appetite. Morgan Stanley says gold will extend losses into Q3 2015 as USD strength hurts bullion. However, they are “not overly bearish” as gold is to remain volatile on continued geopolitical instability and raised its 2014 estimate 1% to USD 1,273/oz, while leaving its 2015 forecast unchanged at USD 1,180/oz.

* * *

DB's Jim Reid completes the overnight recap

Markets don't feel in great shape at the moment and there doesn't seem to be one overriding reason why this is the case. The news flow isn't any worse in aggregate than it has been in recent months and indeed over the last couple of years but perhaps investors are realising that we're very soon to be in a world without US QE and therefore bad news can actually be bad news for markets rather than in more recent times when bad news was often good news due to the extended liquidity it might bring. With the ECB still someway away from QE, even if we think they'll eventually pull the trigger, it’s easy to see how we might be in a liquidity vacuum for a while. As we said in our most recent strategy notes on credit, we think HY is now cheap but fully expect a more volatile environment now the end of QE is in full view.

Yesterday we saw a global risk sell-off which helped the 30yr UST yield fall to its lowest since May 2013. Oil also hit 17 month lows, the S&P 500 (-1.5%) saw its 6th worst day of the year and the VIX hit its highest level since March as the IMF cut its global growth forecasts and German industrial production declined sharply. Overnight we also saw China’s September Services and Composite PMI which both fell – the Services read coming in at 53.5 (from 54.1 in August) whilst the Composite came in at 52.3 (from 52.8 in August).

On the back of this and yesterday’s European and US moves, Asian markets are lower overnight with the Nikkei down -1.4% and the Hang Seng down -0.7% as we type. Credit is also struggling with iTraxx Asia trading +2bps wider.

Looking at the stories from yesterday in more detail, the release of the IMF’s latest world outlook certainly caught the attention of markets. In terms of headline news, the Fund cut its forecast for global growth to 3.3% this year and 3.8% next year (vs. forecasts made in July of 3.4% and 4% respectively). These forecast cuts were made on the back of a weaker than expected start to the year by advanced economies and a weaker outlook for a number of EM economies. The IMF’s Head of Research, Oliver Blanchard, argued that two underlying forces were weighing on the global recovery, “in advanced economies, the legacies of the pre-crisis boom and the subsequent recession, notably high debt burdens and unemployment, still cast a shadow on the recovery, and low potential growth ahead is a concern.” Beyond the weakening of growth expectations, the other big story from the IMF’s latest report is their view that economic developments are becoming more differentiated across economies, with different nation’s recoveries increasingly reflecting country-specific factors. Thus the IMF’s view of higher global growth in 2015 compared to 2014 reflects their view of a stronger US economy (which they forecast to grow by 2.2% this year and 3.1% next year) and a steady (if weak) European recovery offsetting a 0.3% point slowdown in China (where they forecast growth will drop from 7.4% this year to 7.1% next year). Looking through the latest report, two things stand out to us. First is that the US economy is expected to do a lot of heavy lifting next year if global economic activity is to pick up. Can they prosper while others stall? And second is that the IMF (and many other official agencies) have continued to be over-optimistic on growth - yesterday’s forecast was the 9th time in the past 12 forecasts (stretching over three years) that the IMF have marked down their current year growth forecast. So this latest downgrade shouldn't be a surprise but maybe we come back to the fact that this forecast is coming in a period where a lack of US QE is helping focus us on the fluctuating fundamentals more again. Incidentally the IMF talked about frothy equity valuations which didn't help the mood.

Yesterday we also got data on France’s budget gap, which now stands at €94bn YTD, and also heard from the French Finance Minister who said that, rejecting France’s 2015 budget was, “not within the powers of the [European] Commission,” before adding that there would be discussions on budget questions between the various euro zone parties between mid-October and mid-November (Reuters). These comments come amid reports over the weekend that the EU is preparing to reject France’s 2015 budget draft (WSJ) at the end of October after France announced it would run a budget deficit of 4.3% next year, larger than the 3% deficit it had previously pledged to meet. If the EU does reject France’s budget draft, it would mark the first time that the EU has exercised its new powers to demand changes to national budgets granted to the European Commission in 2013. Whilst the likely outcome remains one where both parties are left to save face, it brings into focus the ongoing divisions with the euro area and the continuing structural issues the single currency faces. It also provides the ECB with a headache as it is more difficult to embark on Government QE when a member state is reneging on its budget commitments.

Sticking with the euro area’s travails – yesterday we saw the worst German industrial production growth number since early 2009 as August saw a -4% decline (vs expectations of a -1.5% decline). This latest sign that Europe’s biggest economy is slowing (along with the already mentioned news of the IMF’s latest forecast cut) drove another sell off in risk. In Europe, the Stoxx 600 lost -1.5% to 7-week lows whilst the CAC and DAX dropped -1.8% and -1.3% respectively. The Stoxx 600 is now over 5% down since September 19th. This weakness carried over to Credit where iTraxx Main was +1bp wider, Fin Sen +3bps wider, Fin Sub +6bps wider and Xover was +12bps wider. US credit also struggled with the CDX IG +2bps and CDX HY +6bps. Interestingly Euro area government bonds were relatively unmoved on the day even as the US 10y fell 4bps and the UK 10y fell 6bps. In the US data, JOLTS Job Openings came in better than expected (at 4835k vs. 4700k expected) but there was some talk that the steady and low quits rate reflected an economy with little wage growth. On a standalone basis this should encourage lower rates for longer but the market was in a glass half empty mood yesterday and interpreted as a lack of income growth for the economy.

Looking to the day ahead, in Europe we have Spanish August Industrial Output (expected at +0.9% YoY), whilst in the US the main data point will be the release of the Fed’s September meeting minutes. Also we have Alcoa unofficially kicking off earnings season. Yes it’s that time again..