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Futures Sell Off As Soaring Dollar Weighs On Risk, European Yields Slide To Fresh Record Lows

As noted earlier, starting early with the overnight session there was already some serious fireworks in Asia, when first the USDJPY soared then tumbled, pushing the Nikkei lower some 0.7% with it, driven entirely by the surge in Dollar which rose to a fresh 12 year high overnight after gaining as much as 0.59%, in an extension of Friday’s post-NFP gains. Additionally, the EUR/USD slipped below 1.0800 to touch its lowest level since Sept’03 while USD/JPY rose above 122.00 for the first time since Jul’07, after breaching long-term resistance at 121.85. However, in recent trade the USDJPY has seen a straight line sell-off which in turn has sent US equity futures sliding, and the ES down about 14 points as of this moment. Meanwhile, the frontrunning of the ECB continues, with German 10 Year yields sliding -3bps to 0.281%, the lowest in series history. Also touching fresh record lows were Austrian, Belgian, Dutch, Finnish, Irish, Italian, Spanish 10 Year rates.

The problem for Europe everyone is that most are focusing primarily on the German curve, where the 7 Year just went negative as well. SocGen believes that with German bonds up to Oct. 2018 maturity already trading below the ECB’s deposit rate, making them ineligible for purchases under QE, Bundesbank may struggle to meet its quotas under the scheme. It adds that the outstanding sizes are large in shorter maturity bonds so not being able to buy these makes it difficult to see how Germany’s central bank is going to get its share of the program done. SocGen's conclusion is that the ECB program will fall short of its €1.14 trillion purchase objective, or in other words Q€ will be a failure.

And while markets stage a mini turmoil session, in the background Greece has almost entered the endgame following yesterday's European finance ministers' announcement that aid time and money are running out with Greece still to make good on its bailout commitments; talks with creditors are  due to start tomorrow alongside technical monitoring in Athens. Draghi told Greek officials they face a critical situation and must let euro-area representatives return to Athens if they are ever going to obtain more aid. And thenGerman CDU lawmaker Fuchs, speaking on Bloomberg TV, said Greece not fulfilling its obligations currently and a Greek exit could be managed. In other words, the Syriza government has two choices: run out of money and face a civil war, or allow the hated Troika inspectors who are about to impose even more "austerity" on the Greek people, and be swept from power. Expect the epic fall from Grace of the Tsipras government to soon be a Harvard case study on (mis)managing pre-election expectations.

Asian equities fell after paring earlier gains following a positive Wall Street close, as the USD surged to fresh decade highs ahead of next week’s FOMC rate decision. Nikkei 225 (-0.7%) led the way with losses as the index decoupled from moves in the JPY, with the currency falling to multi-year lows against USD. Hang Seng (-0.9%) fell to a 7-week low weighed on by casino stocks, while the Shanghai Comp (-0.5%) saw some mild profit-taking after finishing yesterday’s session up 2%. Sentiment was further dented by Chinese PPI data which fell for a 36th consecutive month (Y/Y -4.8% vs. Exp. -4.3% (Prev. -4.3%). JGBs pared their earlier advance following the results of today’s JPY 400bln enhanced liquidity auction for old 20s, 30s and 40s, which saw the lowest b/c since December 2013.

European equities have traded lower since the open in sympathy with their Asian counterparts, although price action for stocks has been swayed more by notable underperformance in energy and basic material names as the USD-index weighs on the commodity complex. This has provided a bulk of the direction across equities thus far with the European session currently void of much in the way of macro newsflow. In fixed income markets, Bunds have continued the trend seen since yesterday with German paper continuing to be supported by the beginning of the ECB’s bond-buying programme, while other European paper has printed further record-low yields. Additionally, the German 5s/30s curve is the flattest since 2008 and therefore seeing a continued flattening of the German curve since last week's ECB press conference were Draghi revealed the central bank would not buy bonds with a yield below -0.2%; a threshold which the German Schatz currently resides outside of. However, analysts at IFR note talk that the size of purchases today has fallen from the amount seen yesterday

QCOM to buyback USD 10bln (program now at USD 15bln) and boosts quarterly dividend by 14% to USD 0.48/shr from USD 0.42 vs. Exp. USD 0.47. (BBG) Verisk Analytics (VRSK) are to purchase Wood MacKenzie for GBP 1.850bln. (BBG) Fed's Fisher (Non-Voter, Hawk) said the Fed may have to raise rates sharply if lift-off is postponed. Fisher repeated his preference is to hike rates early and gradually, adding that he trusts Fed Chair Yellen will not wait too long to raise rates. (RTRS/BBG) As a guide, Fisher is due to retire from his role as Dallas Fed President on 19th March.

In FX, the main mover so far has been the USD-index which surged to a fresh 12yr high overnight after gaining as much as 0.59%, in an extension of Friday’s post-NFP gains. Consequently, EUR/USD slipped below 1.0800 to touch its lowest level since Sept’03 while USD/JPY rose above 122.00 for the first time since Jul’07, after breaching long-term resistance at 121.85 (Dec 7th high). Overnight, poor business confidence data weighed on AUD, while NZD briefly saw an aggressive sell-off amid reports of a threat to contaminate infant milk formula with pest-control poison 1080. The NZ police later established there was no sign of contamination which provided some reprieve for the currency.

In Commodities, the main source of direction has stemmed from the broadly stronger USD with bearish sentiment for energy prices also stemming from comments from the Kuwaiti OPEC governor who said he expects OPEC to roll over current policy at the next meeting on June 5th. Furthermore, tomorrow’s DoE inventories are expected to reveal a build of 4.75mln bbls. In metals markets, both spot gold and silver have been weighed on by the USD, while iron prices overnight remained near record lows amid ongoing concerns of weakness in China’s steel industry and mixed data from China where consumer prices beat estimates but producer prices declined for a 36th consecutive month.

Brent decline is longest losing streak in almost 3 months; slumps below $58 for first time since Feb. 19 to near bottom of range since mid-Feb as Iran nuclear talks gain momentum and dollar gains. WTI below $50; EIA inventory data tmrw, Bloomberg survey median est. to show build. April Brent -55c at $57.98 as of 9:04am London, day range $57.89-$58.72; WTI -36c at $49.64, range $49.62-$50.36; volume -44%; WTI 1st-2nd mo. contango stable at -$1.63; settled yday at - $1.66, smallest since Feb. 24; WTI-Brent shrinks to -$8.31; settled at -$8.53, narrowest since Feb. 19

In Summary: European shares trade mixed with the real estate and travel & leisure sectors outperforming and oil & gas, basic resources underperforming. Central banks said to be buying German 5-year notes on day 2 of European QE. Euro continues decline against dollar. China Feb. CPI rise above estimates. Greece to resume talks with its creditors in Brussels on Wednesday. The Swiss and Dutch markets are the best-performing larger bourses, Spanish the worst. The euro is weaker against the dollar. German 10yr bond yields fall; Japanese yields increase. Commodities decline, with copper, nickel underperforming and natural gas outperforming. U.S. wholesale inventories, small business optimism, JOLT job openings due later.

Market Wrap

  • S&P 500 futures down 0.4% to 2068.8
  • Stoxx 600 up 0.1% to 393.6
  • US 10Yr yield up 0bps to 2.19%
  • German 10Yr yield down 3bps to 0.29%
  • MSCI Asia Pacific down 1.1% to 142.4
  • Gold spot down 0.7% to $1158.7/oz
  • Eurostoxx 50 -0.4%, FTSE 100 -0.2%, CAC 40 -0.2%, DAX -0.3%, IBEX -0.6%, FTSEMIB -0.3%, SMI +0.4%
  • MSCI Asia Pacific down 1.1% to 142.4
  • Nikkei 225 down 0.7%, Hang Seng down 0.9%, Kospi down 0.4%, Shanghai Composite down 0.5%, ASX up 0%, Sensex down 0.8%
  • Euro down 0.83% to $1.0762
  • Dollar Index up 0.76% to 98.33
  • Italian 10Yr yield down 5bps to 1.23%
  • Spanish 10Yr yield down 3bps to 1.24%
  • French 10Yr yield down 3bps to 0.57%
  • S&P GSCI Index down 0.6% to 408.1
  • Brent Futures down 1.2% to $57.9/bbl, WTI Futures down 0.8% to $49.6/bbl
  • LME 3m Copper down 1.7% to $5775/MT
  • LME 3m Nickel down 1.6% to $14270/MT
  • Wheat futures down 0.8% to 486 USd/bu

Bulletin Headline Summary from RanSquawk and Bloomberg

  • The USD-index has been the main-mover so far, pushing EUR/USD below 1.0800 and USD/JPY below 122.00 in an extension of the move seen since last week’s NFP report
  • The stronger USD has weighed on the commodity complex, causing underperformance in energy and material-related stocks in Europe
  • Looking ahead, ECB’s Nowotny, BoE’s Carney and McCafferty are all due on the speaker slate
  • Treasuries gain, following euro-area sovereigns, before week’s auctions begin with $24b 3Y notes; WI yield 1.125%, highest since April 2011.
  • Euro-area national central banks were said to have bought government bonds, including German debt that trades with a negative yield, in the second day of QE
  • European finance ministers said time and money are running out with Greece still to make good on its bailout commitments; talks with creditors are  due to start tomorrow alongside technical monitoring in Athens
  • Draghi told Greek officials they face a critical situation and must let euro-area representatives return to Athens if they are ever going to obtain more aid, according to two European officials
  • German CDU lawmaker Fuchs, speaking on Bloomberg TV, said Greece not fulfilling its obligations currently and a Greek exit could be managed
  • China’s consumer prices rose 1.4% in February, faster than economists forecast, after the central bank stepped up policy easing and the Lunar New Year holiday pushed up food and transport costs
  • New Zealand police said they are investigating a threat to poison infant formula, putting the reputation of the world’s biggest dairy exporting nation at risk and sending the local currency lower
  • Credit Suisse Group AG named Prudential Plc’s Tidjane Thiam to replace Brady Dougan as CEO as the bank grapples with declining profitability at the securities unit and weakened capital
  • Sovereign 10Y yields mostly lower. Asian, European stocks lower, U.S. equity-index futures decline. Crude, gold and copper fall


US Event Calendar

  • 9:00am: NFIB Small Business Optimism, Feb., est. 98.9 (prior 97.9)
  • 10:00am: Wholesale Inventories, Jan., est. -0.1% (prior 0.1%); Wholesale Sales, Jan., est. -0.5% (prior -0.4%)
  • 10:00am: JOLTS Job Openings, Jan., est. 5.050m (prior 5.028m)
  • 10:35am: Bank of England’s Carney at House of Lords committee

DB's Jim Reid Concludes the Overnight Recap

Overnight the major news story has been February's CPI and PPI in China. CPI came in notably above expectations at +1.4% yoy vs +1% expected but both Chinese officials and analysts have attributed the rise to Lunar New Year celebrations so it’s not easy to read much into the data. Meanwhile the PPI read of -4.8% YoY was below expectations of -4.3% and was the lowest since October 2009. The PPI number seems to be leading markets down in Asia this morning with its suggestion of a world ex-US struggling to maintain growth. The Shanghai composite is down around -0.2% as we type whilst the Nikkei is down -0.95% and the broad MSCI Apex 50 is down -0.7%. Asian credit markets are trading marginally wider.

Looking back to yesterday and markets were mixed with European government bonds and US equities notably outperforming European equities and global credit markets. On the first day of the ECB’s public purchase program core European government bonds rallied notably with French, German and Dutch 10y yields falling more than 8bps. At this daily rate of performance Bund yields will be -31% by the time the program finishes in September 2016!!! Peripheral yields underperformed a bit however with Italian and Spanish 10y debt closing only 4bps and 2bp lower whilst Greek debt widened by almost 70bps.

Not only did Greek government debt sell off notably, Greek equities also struggled yesterday with the Athex closing the day down 4.2%. The Greek under-performance was driven by yesterday’s disappointing eurogroup meeting which ended with Eurogroup chairman Jeroen Dijsselbloem urging Greece to, “stop wasting time,” as he said, “little has been done since the last Eurogroup (meeting two weeks ago) in terms of talks, in terms of implementation” (Reuters). The day ended with Dijsselbloem adding after the meeting that Greece could gain access to part of its remaining bailout money but only if it follows through on reforms saying, “we stand ready to further support the Greek government on the condition that we have an agreement on the whole package,”. Talks resume tomorrow with technical teams visiting Athens then too (Bloomberg). As DB’s George Saravelos concluded yesterday, “in terms of overall progress, we are therefore left where the Eurogroup was three weeks ago, with the government's cash position the only source of pressure to reach an agreement.” George’s current best guess on when liquidity will cease is early April.

Over in the US equities and government bonds had a solid day with the S&P500 closing up +0.4% and the US 10y falling 5bps. European equities struggled with the Stoxx 600 closing down -0.3%. Credit lagged yesterday with indices wider across the board in both Europe and the US. In terms of other news beyond the start of ECB purchases and the disappointing Eurogroup meeting the only other major data point was German January export and import data which both came in weaker than expected. In other news the Ukrainian President said that pro-Russian rebels in the east had withdrawn a “significant” amount of heavy weapons in the latest sign that the February ceasefire agreement currently seems to be holding (BBC).

With ECB QE kicking off yesterday our fixed income team published an interesting note called, “The real (interest rate) story: Why Europe is not Japan”. The team discuss how comparisons between Japan and the Eurozone have become increasingly common as European bond yields continue their slide towards the very low levels witnessed in Japan since the 1990s, however they think that focusing on the nominal interest rates misses a crucial difference: the real rate / inflation expectation mix is completely different in Europe today relative to Japan in the 1990s. They conclude that barring another external deflationary shock, Europe should be on a different trajectory than Japan in the 1990s. You can read the full report here: For what it’s worth our take on why Europe won't turn into Japan is due to politics. To us it seems highly unlikely that Europe could hold together politically if it endured a lengthy period of ultra low growth and inflation. Voters would likely rebel. So the end game in Europe is more binary in our opinion.

Looking ahead to the day ahead in Europe we have French and Italian January industrial production reads which are both expected to be weaker MoM. Elsewhere EU finance ministers are meeting in Brussels this morning, ECB board member Yves Mersch is speaking in Paris and the Bank of England’s Mark Carney will be up in front of the House of Lords committee. Over in the US it’s relatively quiet on the data front with January wholesale inventories (expected down) and JOLTS job opening reads (expected to rise). After payrolls there will be an even bigger focus on this important employment release.