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Futures Flat As Japan Tumbles, WTI Slides $90 For First Time In 17 Months

Following yesterday's acorss the board US stock market drubbing, equity futures are mostly unchanged awaiting today's key event which is the ECB's latest announcement in just over an hour and Draghi press conference 45 minutes later, both of which however are expected to be far more muted than last month's bombastic announcement (which has already led to new European cracks with Germany throwing up all over Draghi's proposal to buy Greek junk). Additionally there is initial claims and factory orders data, which however will hardly do much to change the recent sharp plunge in global economic momentum as Goldman showed yesterday.

So while equities are hugging the flatline, a bigger story was the overnight crash in the Nikkei225 and the Topix both of which plunged at the fast pace in months, with the Yen spiking, pushing the USDJPY as low as 108.35 after Japan's Vice Finance Minister, Nobuhide Minorikawa, earlier today told reporters that no further increases in the USDJPY wil be tolerated saying  that "there are companies negatively affected by the weak yen." In other words, as we have been saying since December of 2012.

But the biggest market development overnight is the plunge in crude, with both Brent and WTI plunging, the latter sliding under $90 for the first time in 17 months, extending yesterday's selloff after Saudi Aramco cut Arab Light OSP in Asia to 2008 levels. Brent drops to lowest since June 2012. This also confirms that the global slowdown whose can is kicked every so often in a new bout of money printing, is arriving fast. That, and the imminent crackdown on today's Hong Kong protest will likely be the biggest stories of the day, even as the spread of Ebola to the US is sure to keep everhone on edge.

European equities traded in the red from the get-go at the cash open with the fallout of the US sell-off and declines in Asia weighing on investor sentiment. For anyone interested, an explanation detailing yesterday’s sharp declines can be viewed here. On a sector specific basis, energy names underpeform following the extension of the move lower in the energy complex with WTI dipping below USD 90/bbl. Of note for luxury names, LVMH trade higher by 1.2% after being raised at JP Morgan which is subsequently lifting the consumer discretionary sector.

Looking at the day ahead, the main item on the European agenda is the ECB meeting. Beyond that we will also get the September change in Spanish unemployment, the UK construction PMI (expected in at 63.5) and the euro area August PPI (expected in at -0.1% MoM). In the US we will get initial jobless claims (expected at 297k) and the August factory orders (expected at -9.5%).

US Event Calendar

  • 7:30am: Challenger Job Cuts y/y, Sept. (prior -20.7%)
  • 7:30am: RBC Consumer Outlook Index, Oct. (prior 52.4)
  • 8:30am: Initial Jobless Claims, Sept. 27, est. 297k (prior 293k), Continuing Claims, Sept. 20, est. 2.425m (prior 2.439m)
  • 9:45am:  ISM New York, Sept. (prior 57.1)
  • 9:45am:  Bloomberg Consumer Comfort, Sept. 28 (prior 35.5)
  • 10:00am: Factory Orders, Aug., est. -9.5% (prior 10.5%)

Bulletin Headline Summary from RanSquawk and Bloomberg

  • European equities follow on from their US and Asian counterparts after US equities reached their lowest levels since mid-August and the Nikkei 225 saw it sharpest fall since Aug. 8th.
  • Energy names underperform in Europe after WTI crude futures broke below USD 90/bbl for the first time in 17 months.
  • The USD-index trades with losses of around 0.3% which has subsequently boosted commodity currencies and seen USD/JPY break back below 109.00.
  • Looking ahead, attention turns towards today’s ECB policy announcement where the ECB are unlikely to commit to further tools until after embarking on the newest policy - ABS and Covered Bond purchases.

ASIA

JGBs traded up 1 tick at 145.89 after paring earlier gains seen amid spill-over buying from yesterday’s rally across global fixed income markets, weighed on by today’s disappointing 10yr JGB auction. Asian equities traded lower across the board in tandem with the sharp sell-off in stocks markets across both sides of the Atlantic yesterday. The Nikkei traded down 2.6% in what was the largest decline in the index since Aug. 8th. As a reminder, mainland China and Hong Kong markets are closed today for National Day Holiday with Chinese bourses set to reopen next Wednesday and Hong Kong markets resuming on Friday.

FIXED INCOME

Fixed income markets have seen a relatively tentative session so far as participants await the ECB rate decision with Eurozone supply initially capping any potential upside alongside the softness in equities. In terms of this morning issuance, Spain saw a relatively inline auction of their modest 2020 and 2024 bonds, with record-low yields as has been the case in previous auctions. In terms of the French issuance, all three lines saw lower yields, with fixed income markets following suit with the moves in equity markets when both Spanish and French supply had been absorbed.

EQUITIES

European equities traded in the red from the get-go at the cash open with the fallout of the US sell-off and declines in Asia weighing on investor sentiment. For anyone interested, an explanation detailing yesterday’s sharp declines can be viewed here. On a sector specific basis, energy names underpeform following the extension of the move lower in the energy complex with WTI dipping below USD 90/bbl. Of note for luxury names, LVMH trade higher by 1.2% after being raised at JP Morgan which is subsequently lifting the consumer discretionary sector.

FX

Overnight, the USD-index extended on yesterday’s losses consequently supporting major USD pairs with commodity-linked currencies being the main beneficiaries. USD/CAD briefly broke below the 1.1100 handle to print a fresh weekly low while NZD/USD recovered all of Tuesday’s RBNZ FX intervention-inspired declines. AUD also strengthened further after AU building approvals surged to a 3-month high (3.0% vs. Exp. 1.0%) prompting AUD/USD to break above the 0.8800 handle. In terms of the European session, FX markets have traded in a largely rangebound manner with the USD-index continuing to dictate the state of play and GBP/USD pulling away from its highs after the beat on UK construction PMI (64.2 vs. Exp. 63.5).

* * *

DB's Jim Reid concludes the overnight recap

In European equity markets the Euro Stoxx, FTSE 100 and DAX lost -1% whilst the CAC and FTSE MIB dropped -1.2% and -0.9% respectively. Over in the US the S&P500 and NASDAQ closed down -1.3% and -1.6% respectively. In credit markets, European iTraxx Main and US CDX IG widened +0.6bps and +0.3bps respectively, whilst European iTraxx Xover widened only +1bps and US CDX HY was unchanged. European financial CDS indices actually ended the day tighter. The big performers yesterday were government bond markets as the US, German and UK 10Yr fell -8bps, -5bps and -7bps respectively.

There were a few stories impacting markets yesterday. We had the after effects of the first reported Ebola case in the US which caused nervousness, especially in some travel and freight stocks. We also had lots of noise about the Russell 2000 now being 10% off its recent highs. Elsewhere we saw an increase in Russia-Ukraine worries after stories from Ukraine that a shell had killed four people at a school in the rebel-held east (BBC) in what remains a shaky ceasefire with continued flare-ups. The EU is set to keep sanctions against Russia in place as they have deemed the peace deal to not be full effective (BBC). Also we had weaker data on both sides of the pond. On this, whilst ADP US employment growth came in marginally ahead of expectation (+213k vs +205k expected), manufacturing PMI (57.5 vs 57.9 expected), manufacturing ISM (56.6 vs 58.5 expected) and construction spending (-0.8% MoM vs +0.5% MoM expected) all disappointed.

In Europe, although Italian manufacturing PMI’s beat expectation at 50.7 (vs 49.5 expected) and the Spanish and French reads came in-line at 52.6 and 48.8 respectively, the German activity dropped to 49.9 (vs 50.3 expected) which brought the broader eurozone number below expectations at 50.3 (vs 50.5 expected). As DB European Economist Peter Sidorov wrote yesterday on the releases, ‚It is worth noting that the ‘periphery’ is now outperforming the ‘core’ euro countries in the manufacturing PMIs, which could help to partially offset its greater vulnerability on the domestic front. A reduction in fragmentation across countries should also make agreeing on common policy measures easier in the euro area, including the ECB’s easing and the European investment initiative proposals currently under discussion.?  Although the market isn’t expecting any new policy action from the ECB today, asset purchases are set to start this month and the technical details of the ECB’s purchase programmes are set to be announced. More importantly any changes in ECB rhetoric will be closely watched as pressure has continued to build on the ECB to bring in full public QE. There will no doubt be questions about whether government bond purchases will be used if the ECB can't increase their balance sheet by the trillion Euros that Draghi has made a policy aspiration.

In overnight news, Hong Kong’s pro-democracy student protestors have threatened to besiege government offices unless their demands for the resignation of the head of the HK government by Thursday night are met as protests have continued during China’s National Day holiday. This came as China’s Foreign Minister has described the protests as ‚illegal? (BBC). Looking at how markets have reacted overnight they seem largely to be mirroring yesterday’s European and US moves. As we write the Nikkei is down -2% whilst the MSCI Asia Pacific index had been down -0.6% before rallying back slightly to now sit around -0.2%. In credit the iTraxx Asia is wider by around +2bps whilst Japan and Australia’s 10Y government bonds have rallied -0.4bp and -7bps respectively.

Looking at the day ahead, the main item on the European agenda is the ECB meeting. Beyond that we will also get the September change in Spanish unemployment, the UK construction PMI (expected in at 63.5) and the euro area August PPI (expected in at -0.1% MoM). In the US we will get initial jobless claims (expected at 297k) and the August factory orders (expected at -9.5%).