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Market Wrap: Treasury-Equity Reallocation Trade Pushes Futures Lower, 10 Year Rises To 1.72%

While the US daytime trading session has lately become a desperate attempt to expand multiples on the declining earnings of the S&P500, thanks to recurring BOJ intervention in the USDJPY, to keep the S&P above the 100 SMA at all costs including generous central banker verbal intervention...

... then it is during the US overnight session when global deflationary reality reasserts itself with a vengeance, and sure enough at last check, the 10 Year has rallied with 10Y yield hitting 1.71% before this morning’s 4Q GDP release, as well as following the latest deflation number of -0.6% out of Europe (worse than the -0.5% expected) which was the biggest price decline on the continent since 2009.  "Treasuries remained well bid overnight due to month-end index adjustments. Some talk of a  reallocation from equities to bonds trade going through in both Asia and continuing in Europe," ED&F Man head of rates and credit trading Tom di Galoma wrote in a note to explain the latest Great Unrotation, if only until the Virtu HFT algos get the full blessing of the Fed to ramp the USDJPY, and thus the stock market.

The overnight session started on the right foot, with Asian equities trading mostly higher in the final trading day of the week and month with the exception of Chinese bourses, as the ongoing margin trade crackdown continues to weigh on sentiment. Consequently, the Shanghai Comp (-1.6%) is now on course for its biggest weekly loss since the Dec’13 and the Hang Seng (-0.4%) relatively flat. Elsewhere, the Nikkei 225 (+0.4%) is headed for a monthly gain while the ASX 200 (+0.7%) rose above 5,600 for the first time since Sep’14 amid increasing expectations of a rate cut by the RBA next week.

Likewise in Europe, the session saw equities open higher after the positive Wall Street close last night, however through the morning European equities have retraced these gains in line with US Index futures. The session underperformer has been the FTSE, with supermarkets Sainsbury’s (-1.5%) and Morrison’s (-1.2%) weighing on the index after comments from UK Secretary of State for Business Vince Cable yesterday proposing fines of up to 1% of turnover with regards to concerns about supermarket treatment of suppliers. Elsewhere, Banca Monte Paschi (-6.15%) are one of Europe’s laggards today after reports that the Italian bank is contemplating a EUR 1bln capital boost.

In terms of US equities, aftermarket earnings showed Google miss expectation on EPS, while Visa and Amazon both beat. The European morning has seen reports that Alibaba's financial branch are said to IPO in 2016, with the unit valued around USD 50bln. While pre market we’ll see earnings from as well as earnings pre market from Mastercard, AbbVie and Chevron.

Fixed income markets have today seen T-Notes outperform their European counterpart, underpinned by lower US equity futures, indicative of lower open on Wall Street. In Europe, BTPs outperform on the back of strong demand said to be from touted domestic buyers, with analysts at IFR note that month-end is contributing to BTPs strength with the Italian bond contributing the most to this month’s extensions.

In FX markets, today has seen similar price action in EUR/CHF as was Monday, whereby the cross rose quickly before paring the move shortly after, today breaking the 1.05 handle to the upside to its highest levels since the SNB intervention and to trade around levels that some speculate the SNB is comfortable with. As we wrote yesterday, this is most likely an SNB month-end window-dressing trade seeking to make the EURCHF P&L losses on its balance sheet appear more manageable. Another move of note is that of the RUB, which weakened ahead of the Central Bank rate decision. Despite 31 out of 32 analysts expecting rates to be held, the rate was cut by 200 bps which saw USD/RUB break above 70.00.

The commodity complex has ebbed higher today after experiencing recent weakness. However, despite trading in positive territory on the day, WTI crude futures remain on track to reach the longest run of monthly losses since January 2009. News today has seen Libyan oil minister state that the country’s Es Sider port has 2.5mln bbl in storage tanks, with Ran Lanuf also with over 2mln bbl. The minister also stated that Libya oil refineries are processing approximately 150k bpd.

Elsewhere, the precious metals are in the green as gold retraces from recent two week lows. Interestingly, after the month in which SNB removed their floor and ECB announced a QE package over EUR 1trl, the yellow metal is on track for the biggest monthly gain since 2011.

Bulletin Headline Summary from RanSquawk and Bloomberg

  • Volatility in EUR/CHF this morning has renewed speculation of SNB intervention, as the cross trades at levels in which some suggest the central bank may be comfortable with
  • The commodity complex has ebbed higher today after experiencing recent weakness. However, despite trading in positive territory on the day, WTI crude futures remain on track to reach the longest run of monthly losses since January 2009
  • Looking ahead, this afternoon sees GDP from Canada and the US, with Chicago Purchase Manager and the final reading University of Michigan Sentiment data released, as well as pre market earnings from Mastercard, AbbVie and Chevron. 
  • Russia’s central bank lowered its main interest rate as concern over a looming recession took precedence over  stabilizing the ruble and taming runaway inflation. The ruble weakened beyond 70 against the dollar
  • European Union governments moved toward imposing further economic sanctions on Russia, casting a pall over plans to resume talks Friday in Belarus over the conflict in Ukraine
  • Mario Draghi’s deflation challenge was underlined on Friday with prices plunging at a pace last seen in the depths of the recession in 2009
  • Spain’s economy expanded at its fastest pace in seven years in the fourth quarter as lower prices helped boost domestic demand
  • Prime Minister Alexis Tsipras promised not to spring any surprises on Greece’s troika of official creditors in the first face-to-face meeting with European officials since his Jan. 25 election victory
  • Finance Minister Yanis Varoufakis said he’s not interested in persuading Greece’s official creditors to release the final €7b ($8b) of bailout funds as Eurogroup Chief Jeroen Dijsselbloem headed to Athens for talks on Friday
  • Sovereign yields mostly lower, Greece 10Y falls 15bps to 10.02%  Portugal, Spain and Italy also lower. Asian stocks mostly higher; European stocks mixed, U.S.  equity-index futures gain. Brent, WTI and gold rise; copper gains

US Economic Calendar

  • 8:30am: Q4 GDP Annualized, 4Q Advance, est. 3% (prior 5%)
  • Personal Consumption, 4Q, est. 4% (prior 3.2%)
  • GDP Price Index, 4Q, est. 0.9% (prior 1.4%)
  • Core PCE, 4Q, est. 1.1% (prior 1.4%)
  • 9:00am: ISM Milwaukee, Jan., est. 58 (prior 57.61)
  • 9:45am: Chicago Purchasing Manager, Jan., est. 57.5 (prior 58.3, revised 58.8)
  • 10:00am: U. of Mich. Sentiment, Jan. final, est. 98.2 (prior 98.2)

DB's Jim Reid concludes with the comprehensive overnight summary

Today sees the business end of a month I'd like to see the back of after a cracked rib and a snapped MCL and ACL. Markets have been as wild as my skiing and we'll review it in full on Monday but its not impossible that the S&P 500 will see a January decline (currently -1.83%) whilst the DAX might see a 10% increase (currently +9.51%). We've also seen a further sizeable fixed income rally, big moves in currencies, the Swiss Franc shock, sizeable Euro QE announced and the historic Greek election results.

Expect to see people discussing the January effect and its impact on the rest of the year. A good January has usually (but not always) been associated with a good year for US equities. Indeed using 87 years of data from Bloomberg, there have been 55 positive Januaries with 44 of those going on to have positive years with an average increase of about +20%. Of the 32 negative January months that we've had since 1928, 'only' 14 of those went on to finish the year higher in the end with average annual returns of around +14%. The remaining 18 negative Januaries were associated with a negative full year performance with an average return of around -14%. Clearly past performance doesn't guarantee future returns and its a bit spurious but its always fun to look at. Indeed post crisis we've seen a few counter trend moves as three years (2014, 2010 and 2009) have seen the year bounce back from a bad January performance.

Yesterday’s +0.95% return for the S&P 500 was a welcome one for equity bulls following two previous sessions of 1%+ declines. The closing level actually hid what was a decent rebound off the intraday lows as markets initially traded down 0.6% with energy stocks trading weaker. A bounce in both WTI and Brent (+0.18% and +1.36% respectively at the close) helped the energy component finish in the green (+0.17%). Just on the subject of oil, we saw signs of a further subdued outlook at the micro level as ConocoPhillips reported that it plans to cut capex by 30% this year following its Q4 earnings report which also saw them post a quarterly loss. Meanwhile over in Europe, Royal Dutch Shell yesterday announced that they will reduce investment spending by $15bn over the next three years. Back to the US, macro data yesterday also helped support a better tone through the day. The initial jobless claims print in particular was strong. The 265k reading came in well ahead of expectations (300k) and was down over 40k from the previous reading. In fact the print was the lowest since April 2000 and helped drag the four-week average back below 300k to 298.5k although it’s worth pointing out that last week was a holiday-shortened week. Pending home sales on the other hand were weak with the -3.7% mom reading well below the +0.5% expected. Treasuries gave up some of the previous day’s gains with the 10y benchmark finishing 3bps higher at 1.751%. The theme of Dollar strength continues however as the DXY rose a further +0.23%.

Turning our attention to the latest Greek developments, the ASE closed +3.16% firmer and 10y Greek yields rallied some 21bps as rhetoric out of Euro-area officials helped lift sentiment. Yesterday’s meeting between PM Tsipras and the European Parliament President Schultz appeared to yield some supportive comments. Specifically Schultz was reported on Reuters as saying ‘I have seen that the government of Alexis Tsipras is not thinking about going it alone, it wants to make proposals and it wants these proposals to be discussed with partners’ as well as saying that ‘it’s important that he wants to find common ground with his peers’. Today we see the Eurogroup President Dijsselbloem meet with both finance minister Varoufakis and Deputy PM Dragasakis. This will come after comments from the Eurogroup President who yesterday was quoted on Bloomberg saying that ‘we want to keep Greece in the euro zone, the EU, but that also requires Greeks to meet their commitments’.

There was also some commentary out of ECB officials yesterday, unsurprisingly skewed towards the cautious side. In a Bloomberg report the ECB’s Jazbec was quoted as saying that the new Greek government is sending ‘very mixed signals’ and that ‘it’s too early to directly answer questions on when and how the ECB can buy Greek government bonds’. Meanwhile, the ECB’s Nouy was quoted in the Greek press saying that although ‘a lot of good work has been done to strengthen Greek banks balance sheets’ that the country’s lenders still ‘need to manage, in a conservative fashion, their liquidity positions’. DB’s resident expert George Saravelos yesterday summarized the latest developments since Greece’s election on Sunday in a note. George writes that developments and pressure on Greece have accelerated over the last few days, with a very large degree of uncertainty around both the Greek government’s and Troika’s position on how negotiations will proceed. George expects this to ultimately be resolved by a Troika request from the Greek side to commit to program completion and the broad contours of previously committed policy, particularly with regard to structural reform. The ECB/ELA financing of Greek banks however will likely determine the path Greece takes. In terms of what to look out for next week, finance minister Varoufakis will be meeting with various European finance ministers early on before we have Wednesday’s bi-weekly review of the ELA facility and then Greek parliament opening on Thursday.

In terms of the rest of Europe yesterday, the Stoxx 600 finished -0.09% although both the DAX (+0.25%) and CAC (+0.44%) closed firmer after trading between gains and losses for most of the session. There was similar volatility in fixed income markets although 10y Bunds closed relatively unchanged at 0.359% whilst peripheral yields finished 1-2bps wider. Away from Greece, German inflation caught the headlines after the region reported a -0.3% yoy headline reading, below expectations (-0.1%) and down from +0.2% previously. Our European colleagues noted that energy prices falling 9% were in line with the oil price and exchange rate movements whilst food price inflation was largely unchanged. Instead they expect that the softer number is largely as a result of lower core inflation which they estimate to have fallen to +1.1% yoy from +1.3% previously. In terms of the rest of the data yesterday, Spanish retail sales bounced (+6.5% yoy from +1.9% previously), German unemployment was unchanged at 6.5% and Eurozone money supply ticked up a notch to 3.6% yoy (from 3.1%). Confidence indicators for the Euro-area meanwhile were largely in line with consensus.

Wrapping up yesterday’s news, it was perhaps only appropriate after our review of Central Banks in yesterdays EMR for Denmark to announce another cut to their deposit rate. The Nationalbanken eased a further 15bps to take the deposit rate to -0.5%, the third easing in ten days with the Central Bank looking to defend the Krone. Elsewhere the FT reported that EU ministers yesterday failed to agree on further sanctions to be placed on Russia over the conflict in Ukraine. In an emergency meeting, the EU instead instructed the European Commission to provide more prep work around ‘appropriate action’ with a final say likely to come at a summit on February 12th