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Lack Of Daily Central Bank Intervention Fails To Push Futures Solidly Higher, Yen Implosion Continues

While it is unclear whether it is due to the rare event that no central bank stepped in overnight with a massive liquidity injection or because the USDJPY tracking algo hasn't been activated (moments ago Abe's deathwish for the Japanese economy made some more progress with the USDJPY hitting new mult-year highs over 113.6, on its way to 120 and a completely devastated Japanese economy), but European equities have traded in the red from the get-go, with investor sentiment cautious as a result of a disappointing the Chinese manufacturing report. More specifically, Chinese Manufacturing PMI printed a 5-month low (50.8 vs. Exp. 51.2 (Prev. 51.1)), with new orders down to 51.6 from 52.2, new export orders at 49.9 from 50.2 in September. Furthermore, this morning’s batch of Eurozone PMIs have failed to impress with both the Eurozone and German readings falling short of expectations (51.4 vs Exp. 51.8, Last 51.8), with France still residing in contractionary territory (48.5, vs Exp and Last 47.3).

Regarding Europe's final September PMI print, Goldman comments as follows: "The Euro area Final manufacturing PMI printed at 50.6 in September, 0.1pt below the Flash estimate (and the Consensus expectation). This implies that the Euro area manufacturing PMI rose 0.3pt in October, the first increase since April. The German Final manufacturing PMI for October was revised down 0.4pt while the French manufacturing PMI was revised up substantially by 1.2pt. The Spanish manufacturing PMI surprised slightly to the upside by remaining unchanged at 52.6 (Cons: 52.2). The Italian manufacturing PMI fell notably by 1.7pt to 49.0 (Cons: 50.6). This suggests some implicit downward revisions outside Germany/France."

The breakdown in October was mixed. Both new orders and stocks improved marginally, the former increased by 0.3pt to 49.5, while the latter increased by 0.4pt to 50.0, leaving the forward-looking order-to-stock ratio slightly lower in October; following gradual declines during 2014, this ratio now stands at the lowest level since April 2013. Production and employment improved by 0.5pt and 0.3pt in October, respectively.

With today's Final print, the Euro area manufacturing PMI is now estimated to have risen slightly in October (0.3pt), the first increase since April. Between April and September, the Euro area manufacturing PMI eased by about 3pt. Prior to that, the Euro area manufacturing PMI rose sharply by around 10pt between July 2012 and early 2014 (and remained broadly unchanged in the spring).

On an index specific basis, the MIB leads the way lower for Europe with Snam (-6.7%) and Terna (-11.5%) sharply lower following Mediobanca cutting rating on both companies in reaction to the Italian energy regulator's gas storage remuneration decision. Italy's Monte Paschi continues to be halted first down, then up, after tumbling again earlier today, then surging, but in any event is now 40% lower since the stress test results were announced. Elsewhere, HSBC (-0.3%) reported this morning and trade with modest losses after they fell short of expectations and set aside USD 378mln in provisions for FX investigations. Furthermore, Ryanair (+9.1%) have lifted UK airliners after their pre-market update where they lifted their forecast, with easyJet and IAG leading the FTSE 100. With macro newsflow relatively light over the weekend, fixed income products have seen a flight to quality and have traded in the green throughout the session.

Of course, by now everyone knows that the traditional pattern is weakness at the US open, ramping into Europe close, then ramping some orem to preserve faith in central planning. Today should be no different.

Looking at today's economic calendar, we have U.S. manufacturing PMI, ISM manufacturing, construction spending, vehicle sales due later.

Market Wrap

In short: European shares remain lower with the utilities and health care sectors underperforming and travel & leisure, basic resources outperforming. Euro-area October manufacturing PMI was below estimates, U.K. PMI above. Companies including HSBC, Holcim Ryanair issued results. The Italian and Spanish markets are the worst-performing larger bourses, the Dutch the best. The euro is weaker against the dollar. Spanish 10yr bond yields rise; Greek yields increase. Commodities gain, with soybeans, corn  underperforming and natural gas outperforming.

  • S&P 500 futures down 0.1% to 2010.1
  • Stoxx 600 down 0.2% to 336
  • US 10Yr yield down 1bps to 2.33%
  • German 10Yr yield at 0.84%
  • MSCI Asia Pacific down 0.8% to 140.8
  • Gold spot down 0.1% to $1172.5/oz

Bulletin Headline Summary

  • Lacklustre Chinese and Eurozone manufacturing PMIs dictate the price action in Europe with equities trading in a sea of red.
  • USD/JPY breaks above overnight highs at 112.99 and trips stops through 113.00 to trade at its highest level in 7 years.
  • Looking ahead, attention turns towards US manufacturing PMI, ISM manufacturing and any comments from ECB’s Constancio, Fed’s Evans and Nowotny after the European close.


FX markets, remain relatively tentative, with price action in EUR/USD muted after tumbling to Aug’12 levels overnight after tripping sell stops at the 1.2500 handle to break below Friday's lows at 1.2585. However, moving forward, price action for the pair may be largely dictated by a raft of option expiries with 3bln due to roll-off for EUR/USD at 1.2500 tomorrow. GBP/USD has been one of the sessions other notable movers following the better than expected UK manufacturing report (53.2 vs. Exp. 51.4) which came in at its highest level since July and pushed the pair back above the 1.6000 handle. USD/JPY trades at its highest level in 7 years after breaking above the overnight high of 112.99 and tripping stops to the upside at 113.00. The move saw USD/JPY take out an option barrier at 113.00, with the next one said to be placed at 113.50 and stops also said to be placed at 113.20.


Heading into the North American open WTI crude futures have moved back into positive territory, shrugging off overnight losses following the weak Chinese data, which has placed weight on the precious metals sector. Overnight, precious metals weakened again as the USD resumed its recent rally following the surprise BoJ announcement, with gold (-0.31%) initially falling to near the four-year low it hit on Friday. Silver prices fell in tandem and declined for a fourth successive session to their lowest since February 2010.

Venezuela and Ecuador are working on a joint proposal to defend oil prices that the two countries will present at the next OPEC meeting, according to the Venezuelan PM. (RTRS) As a guide, the next OPEC meeting is scheduled for Nov. 27th

Pro-Russian rebels have voted to set up a separatist leadership in eastern Ukraine, taking the region closer to Russia and defying Kiev and the West, as shelling continues across the country. (RTRS)

* * *

DB's Jim Reid concludes the overnight recap

After one of the mildest Octobers on record in the UK it seems a shame to welcome in November and what will most likely soon be a cold spell to shock the system. As part of our seemingly endless house renovations we've just had one of those new heating systems installed that are zoned and controlled by an app and hopefully will save us money over the medium term. I've been waiting for a cold spell to check on my wife's heating consumption when I'm not there as I can see it all at the touch of a button on my phone. So far its been too warm to need it but things will change soon no doubt. Its fair to say that I tend to put the heating on as late in the year as I possibly can whereas my wife is not impartial to a little boost in August if the weather is unkind. During this mild autumn there have been no arguments. I fear it won't be long before tensions start though but I at least now have the technology to override from wherever I am in the world. I suspect it will be a brave move to use this veto though.

As its now November we produce our regular cross asset class performance review at the end with all the usual charts and tables in the pdf. Its clearly been a fascinating month and one where the hint of future central bank action (and then on the last day actual action from the BoJ) was enough to see huge swings from the lows.

Central banks continue to be the main story in financial markets and this week attention will move firmly towards the ECB. A few people asked me on Friday as to whether the BoJ surprise move on Friday took the pressure off the ECB or put it firmly back on them. Overall I would say the latter as although the BoJ's increase in purchases aren't huge, it does send a message that they are determined to carry on printing money if needed and are clearly prepared to use the currency to help meet their inflation goal of 2%. They're now buying JPY80tln of paper per month which is getting to within 15-20% of what the Fed were doing at their peak despite being an economy less than a third of the size. Even with that you still don't get the impression that the BoJ will stop until they've succeeded or the policy spectacularly fails. In the meantime if Europe stands still the risk is a repeat of the domestic inflation dip that originated from the last big Yen devaluation from the middle of 2012 to the start of 2014 when EURJPY moved from around 95 to nearly 145 (around 141 currently). Indeed we think the BoJ's move and likely ECB future move still makes QE4 in the US a realistic possibility when the next US growth slowdown occurs. If there is a global currency war, a stronger dollar will mean the US is unlikely to be able to get rates high enough in this cycle to be able to avoid unconventional policy again in the future. So we still think central banks are trapped into years of money printing ahead.

As for this week, DB's Mark Wall thinks that if the ECB simply repeat the line that the Council “remains unanimous in its commitment to other unconventional policies if necessary” then it will disappoint the market. So as a minimum they probably need to hint at more accommodation at their December meeting. Its perhaps pretty unrealistic to expect a BoJ-style surprise initiative this week though. Public QE is likely coming but it feels like more of a 2015 story as consensus will take time to build on the council.

Looking at news over the weekend, the main headline was China’s official manufacturing PMI which printed below expectations at 50.8 (51.2 exp.), down from 51.1 in September and marking a five month low. The new orders index didn’t fare much better, 0.6pts lower at 51.6 whilst the input prices index declined 2.3pts to 45.1. This has been followed up this morning with further data in China including a fairly subdued non-manufacturing PMI (53.8 vs. 54 in September) and an HSBC manufacturing PMI of 50.4, unchanged on the reading earlier in the month. Markets are fairly mixed overnight with bourses in Hong Kong, Korea and Australia -0.3%, -0.8% and -0.4% respectively as we type whilst Chinese equities are firmer (+0.3%) despite the softer prints. Japan is closed for a public holiday.

Just recapping a busy day of price action on Friday, the Nikkei closed just shy of intra-day highs at +4.8% whilst the S&P rallied 1.2% and CDX IG tightened 2bps. Treasuries were unsurprisingly weaker given the risk on sentiment with the 10y 3bps wider. The Dollar index rallied 1% including a 2.3% gain versus the Yen whilst Gold declined 2.1%. With the focus on Japan, the data prints went almost unnoticed on Friday with a solid October University of Michigan consumer sentiment reading (86.9 vs. 86.4 in September) and a 5.7 point rise in Chicago PMI offset by softer September personal spending (-0.2% mom vs.0.1% mom expected). The September personal income print (0.2% mom vs. 0.1% expected) and the PCE deflator (0.1% vs. 0.1% expected) rounded off the readings.

On this side of the Atlantic the Stoxx 600 finished +1.8% on Friday to close out a strong week. The soft European inflation prints helped support calls for future ECB stimulus with the core inflation reading marginally lower at 0.7% yoy (0.8% yoy expected) and unemployment unchanged at 11.5%. There were further disappointing prints in France with consumer spending declining 0.8% mom (-0.3% expected) and German retail sales -3.2% mom (-0.9% mom expected) although the numbers were perhaps impacted by holiday timings.

Closer to home, UK banks rallied following news from the Bank of England on Friday that the rules around leverage would be less stringent than widely expected. The BoE have stated that important lenders will face a basic leverage ratio of 4.05% from 2019 with a further buffer of 0.9% for excessive lending, following expectations that the basic ratio could be set at around 5%. Barclays shares surged over 8% on Friday following the news after previous worries that the bank was most at risk whilst RBS, HSBC and Lloyds all rallied on the day. UK Bank credit, especially AT1s, also benefited.

Away from the core markets, Brazil was back in the headlines as it reported its largest monthly deficit on record. The overall public sector deficit of R$69.4bn was the worst since records began in 2001 and comes following a heightened election process and surprising rate hike last week. The BRL depreciated 2.5% versus the Dollar on the back of the print whilst our Emerging Markets colleagues noted the considerable uncertainties around government fiscal plans for next year.

Before we run through the main highlights this week, one thing to note on the agenda are the midterm elections in the US with the result due on Wednesday. The view is largely that Republicans will take control of the Senate, however a result whereby the Senate becomes divided could add some volatility to markets.

As for the rest of the week ahead before we get to ECB Thursday we have a pretty full calendar and then payrolls finishing off the week the day after. Today we kick off with the ISM reading in the US as well as construction spending and motor vehicle sales whilst across the pond we’ll first see PMI prints for the Eurozone as well as regionally in France, Germany and Spain. Tuesday will see Eurozone PPI and we will keep an eye for any interesting comments to come out of ECB’s Costa speaking on the Portuguese economy the same day. We'll also see the mid-term elections in the US which will be interesting. There will be a lot to digest on Wednesday as we await ADP, the non-manufacturing ISM print in the US along with services PMI in China and retail sales readings in Europe and various composite and services PMI prints across the continent. This all comes at the same time as various members of the Fed are speaking, in particular we’ve got Kocherlakota commenting on monetary policy and Lacker speaking on financial stability. At the back end of the week it’s time for claims data in the US on Thursday along with the remaining PMI prints in Europe. We round out the week with industrial production in Germany and the ever important payrolls data on Friday in the US. Our US colleagues expect a print of 225k. In case that wasn’t enough to digest, we’ve got earnings reports from 84 S&P500 companies and 101 Stoxx 600 companies for us analyze. The standout names include Walt-Disney and Time Warner in the US and closer to home HSBC, Santander and Astra-Zeneca will be reporting.