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Equity Futures Fail To Surge Despite Ongoing Bad News Onslaught

A quick anecdote that should quickly confirm just how broken everything is: earlier today MarkIt reported European manufacturing data that was atrocious, with both German and European PMIs tumbling to levels not seen since mid-2013, and with Europe's growth dynamo now in a contraction phase clearly signalling what has been long overdue: a European triple dip recession. So what happens? Moments later Germany sells €4.1 billion in 10 Year paper at a record low yield below 1%.... even as the Bundesbank had to retain a whopping 17.84% of the auction, the highest since June, with only €4.663 Bn in bids for the €5 Bn target, the first miss since May 21. So hurray for the central banks, boo for the economy, and as for that mythical creature, once known as bond vigilantes, our condolences: good luck figuring out what the hell just happened, and good luck recalling what a free market is.

That, of course, merely adds to the latest news in the past 24 hours, where we learned that Ebola, despite the fervent promises of the administration otherwise, has finally made landfall in the US in an uncontrolled manner; that, and of course, the Hong Kong protests which thanks to the national holiday today, will likely see the biggest participation yet. But what is most disturing is what Goldman said in its summary of yesterday's trading day: "Shorts were pressed with the “most short” basket closing down -1.7%." That is truly terrifying because it actually makes sense: and nothing has made sense since the central banks made a mockery of capital markets six years ago.

And while US equity futures have gone nowhere fast in the overnight session following yesterday's weak trading session, the Europen periphery once again outperforming the core as details of the ECB’s ABS buying strategy begin to emerge, suggesting the ECB could purchase high-risk southern European ABS in order to ease the monetary transmission mechanism - including Greek and Cypriot debt specifically. As such, the Athens Stock Exchange has risen as much as 2%, with the GR/GE 10yr yield spread collapsing by up to 40bps. The DAX future topped yesterday's highs in early trade as adidas shares rose over 4% after announcing a EUR 1.5bln share buyback scheme. The FTSE-100 however, is seeing little reprieve as fears that J Sainsbury could review their dividend policy in the wake of trimming their sales forecast in a trading update (Sainsbury's dividends had been sacred under Justin King). UK retailers are once again under pressure, with YTD losses in the major UK supermarkets now running at 30%-45%. 11 out of 19 Stoxx 600 sectors rise; banks outperform, oil & gas cos. underperform. 57.8% of Stoxx 600 members gain, 38.8% decline. Eurostoxx 50 +0.1%, FTSE 100 -0.2%, CAC 40 -0.1%, DAX +0.2%, IBEX +0.5%, FTSEMIB +0.1%, SMI +0.1%

A number of Asian markets are closed overnight as it is National Day in China. Looking at those that are open however, the Nikkei is down -0.6% after the USDJPY briefly touched 110 then retreated, and iTraxx Asia IG tighter by 1bp, however the MSCI Asia index is down -0.4%, driven partly by news that pro-democracy protestors in Hong Kong are blocking roads at the start of the national holiday. In other news overnight we got China’s  manufacturing PMI which came in just ahead of expectation at 51.1.  Asian stocks fall with the Nikkei outperforming and the Kospi underperforming. MSCI Asia Pacific down 0.4% to 139.7. Nikkei 225 down 0.6%, Hang Seng down 1.3%, Kospi down 1.4%, Shanghai Composite up 0.3%, ASX up 0.8%, Sensex down 0.1%. 0 out of 10 sectors rise with consumer, industrials outperforming and energy, financials underperforming

In the US we will get the September ADP employment report (expected at 205k), PMI (expected at 57.9) and Manufacturing ISM (expected at 58.5). A busy start to Q4. Roll on Xmas!!

Market Wrap

  • S&P 500 futures down 0.1% at 1964
  • Stoxx 600 up 0.1% to 343.3
  • US 10Yr yield unchanged at 2.49%
  • German 10Yr yield down 1bps to 0.94%
  • MSCI Asia Pacific down 0.4% to 139.7
  • Gold spot down 0.1% to $12081/oz

Bulletin Headline Summary from Ransquawk and Bloomberg

  • German Manufacturing PMI indicates economic contraction for the first time in five quarters, however Germany manages to sell 10yr debt at below 1% for the first time in recorded history
  • Greek assets surge as reports suggest the ECB will drop quality requirements in their ABS purchase program to make junk-rated debt eligible for purchase
  • Looking ahead, markets receive their first clue for Friday’s NFP today, with ADP Employment Change due at 1315BST/0715CDT, followed by ISM Manufacturing at 1500BST/0900CDT.
  • Treasuries steady in overnight trading as Euro-area factories cut prices in September and German manufacturing dropped, heightening expectations of more aggressive asset purchase program being announced at tomorrow’s ECB meeting.
  • U.S. dollar extended its longest winning streak in more than two years before a report that may show U.S. hiring increased
  • The Federal Reserve is stepping up its oversight of high-risk leveraged loans, shifting to a deal-by-deal review after its previous industry-wide guidelines were largely ignored by banks
  • Germany auctioned 10-year bonds to yield less than 1% for the first time, as a weakening euro-area economy and the prospect of further stimulus from the European Central Bank reduce borrowing costs across the region
  • Mario Draghi’s pledge to boost the region’s economy via ABS purchases has helped hand investors in the $317b market the best returns in 20 months
  • After proclaiming in 2007 that the ruble was poised to become a haven for global investors, Putin has watched it fade, a victim of his nation’s stagnating economy
  • Hong Kong’s Chief Executive Leung Chun-ying was jeered by pro-democracy demonstrators at a ceremony to hoist the Chinese flag as the city entered the sixth day of protests seeking free elections
  • Sovereign 10Y yields mostly lower, led by Greece (-16.3bps). USD strengthens, at highest level since June 9, 2010. Asian and European stocks  mostly lower. U.S. equity-index futures down. WTI crude higher, gold, copper rise

US Event Calendar

  • 7:00am: MBA Mortgage Applications, Sept. 26 (prior -4.1%)
  • 8:15am: ADP Employment Change, Sept., est. 205k (prior 204k)
  • 9:45am: Markit US Manufacturing PMI, Sept. final est. 57.9 (prior 57.9)
  • 10:00am: ISM Manufacturing, Sept., est. 58.5 (prior 59); ISM Prices Paid, Sept., est. 57 (prior 58)
  • 10:00am: Construction Spending m/m, Aug., est. 0.5% (prior 1.8%)
  • Total Vehicle Sales, Sept., est. 16.8m (prior 17.45m) Central Banks
  • 12pm: Dudley speaks in New York
  • 1pm: Lockhart speaks in Atlanta
  • 8pm: Bullard speaks in Mississippi

FIXED INCOME

At auction, Germany failed to draw enough bids (excluding Buba retention) to meet their target in a 10yr Bund auction, however the remaining investors were willing to accept yields below 1% for the first time. The lower yield did little to dampen appetite in Bund futures, which rose to contract highs of 149.93 in the minutes following the auction. Elsewhere, Gilt futures traded higher throughout the morning, despite the 2020 supply from the DMO (which passed by smoothly) as UK Manufacturing PMI fell to April 2013 lows, primarily driven by new orders, which fell to 18 months lows.

EQUITIES

The periphery once again outperforming the core as details of the ECB’s ABS buying strategy begin to emerge, suggesting the ECB could purchase high-risk southern European ABS in order to ease the monetary transmission mechanism - including Greek and Cypriot debt specifically. As such, the Athens Stock Exchange has risen as much as 2%, with the GR/GE 10yr yield spread collapsing by up to 40bps. The DAX future topped yesterday's highs in early trade as adidas shares rose over 4% after announcing a EUR 1.5bln share buyback scheme. The FTSE-100 however, is seeing little reprieve as fears that J Sainsbury could review their dividend policy in the wake of trimming their sales forecast in a trading update (Sainsbury's dividends had been sacred under Justin King). UK retailers are once again under pressure, with YTD losses in the major UK supermarkets now running at 30%-45%.

FX

EUR/USD fell back below 1.26 as Germany's final manufacturing PMI was revised below 50.0 - indicating contraction for the first time in 15 months,  however yesterday's lows at 1.2571 provide a modicum of support. Overnight, the USD began October on a very strong note, lifting USD/JPY above 110.00 for the first time since mid-2008 - however profit-taking quickly corrected to pair to nearer 109.75 ahead of the US open. AUD fell sharply against all of its peers in the wake of poor Australian retail sales which came in at a 4-month low (+0.1% vs. Exp. +0.4%). Consequently, AUD/USD tumbled to trade just 6 pips shy of technical support seen at 0.8660 (YTD low) which is broken would see the pair trade at its July 2010 levels.

COMMODITIES

WTI and Brent crude futures trade slightly higher after yesterday’s sharp sell-off, with Goldman Sachs’ head of commodities Currie repeating that the commodities super-cycle has come to a conclusion but would still recommend having an allocation in commodities. As such, Currie recommends aluminium and zinc over copper and gold, and does not expect a collapse in the WTI crude price. Today’s DoE crude oil inventories now take focus, with the headline expected to show a build of 1.5mln bbls.

* * *

DB's Jim Reid as usual concludes the overnight news summary

In our long-term study we noted that the G7 government debt to GDP level has continued to rise and is at its highest levels in observable history outside of WWII. While we discussed how government bonds were probably in a bubble now, we considered how this might have to continue for longer than seems sensible as central banks may need to ensure that yields are low enough to comfortably fund the debt in spite of these ever higher debt levels. If yields rise too much then solvency questions might be asked again. On this theme, earlier this week the 16th annual Geneva Report was released – entitled “Deleveraging? What Deleveraging?”. The piece discusses how global total debt-to-GDP numbers are hitting new post-2001 highs after a brief growth pause in 2008-09. The report shows that up to 2008 this rise in leverage was driven by DM economies, however since 2008 it has been led by EM economies, most notably China. In terms of the ability of economies to carry this debt, the report notes that the crisis caused a permanent decline in the growth rate of developed economies and that growth in emerging markets (most notably China) has also been slowing since 2008. Much as we raised concerns over the ability of governments to manage their debt’s if rates rise, the Geneva Report highlights how debt capacity will be under pressure if the actual real interest rate settles above its equilibrium level, a situation which would be likely to come about in economies facing the twin pressures of falling inflation and the zero lower bound, as well as those nation’s facing possible increases in risk due to large legacy debts. The report concludes by arguing that rates should be raised cautiously as given the above context and still high leverage levels, allowing real rates to rise above equilibrium levels could kill the recovery and make future deleveraging even harder. The report also calls for ECB public QE, arguing that further policy procrastination risks the medium-term resurgence of pressures on Eurozone sustainability. It certainly makes for interesting reading if you have some spare time. It sounds bad but if it means central banks stay aggressive for longer than credit should continue to be in demand for yield purposes and the artificially low default rate should continue.

Whilst were on the topic of eurozone concerns, yesterday was a big day for economic data and saw the release of various inflation numbers through the region. Italy’s September inflation read suggested an economy now in outright deflation as YoY Harmonised CPI remained at a multi-decade low of -0.2%. The broader eurozone core inflation rate flash estimate for September slipped to +0.7% YoY whilst French August PPI’s came in below expectation at -1.4% YoY. This all raised QE expectations further in markets. Tomorrow's ECB meeting is perhaps far too soon for anything radical, but the Q&A will be very interesting. In better economic news German August MoM retail sales and French August MoM consumer spending both exceeded forecasts, rising +2.5% and +0.7% respectively, whilst UK Q2 GDP was revised up +0.1% to +0.9% QoQ. We also got the September German and August Italian unemployment rates with the German read coming in at its estimated level (6.7%) whilst the Italian read at +12.3% beat estimates (of +12.6%). In other news yesterday the Catalan government said it was halting its referendum publicity campaign whilst it appealed Monday’s Supreme Court decision to suspend the region’s independence referendum scheduled for November 9th as it considered the Spanish government’s appeal against it.

On the other side of the Atlantic the data was weak with the September Chicago PMI and Consumer Confidence reads both missing estimates at 60.5 and 86 respectively. S&P/Case-Shiller house prices also disappointed as they fell by -0.5% MoM in July vs a forecast of no change.

Whilst the data was mixed, European markets were pretty much one way yesterday, probably on fresh QE hopes. The Stoxx 600 rose +0.6% whilst the CAC, IBEX 35 and FTSE MIB rose +1.33%, +1.57% and +1.82% respectively. Credit also had a strong day with iTraxx Main and Xover -4bps and -14bps tighter respectively. These gains were probably helped by the move in the euro, as EURUSD fell -0.4%. Over in the US equity markets underperformed with the S&P 500 and NASDAQ ending the day down -0.3%. US credit outperformed however, with CDX IG and CDX HY tightening by -3bps and -14bps respectively after a difficult and under-performing few days.

A number of Asian markets are closed overnight as it is National Day in China. Looking at those that are open however, the Nikkei is up +0.1% and iTraxx Asia IG tighter by 1bp, however the MSCI Asia index is down -0.4%, driven partly by news that pro-democracy protestors in Hong Kong are blocking roads at the start of the national holiday (Bloomberg News). In other news overnight we got China’s manufacturing PMI which came in just ahead of expectation at 51.1.

Looking to the day ahead we have September manufacturing PMI’s in Europe with the reads for Italy (expectation: 49.5), France (expectation: 48.8), Germany (expectation: 50.3), the Eurozone (expectation: 50.5) and the UK (expectation: 52.7). In the US we will get the September ADP employment report (expected at 205k), PMI (expected at 57.9) and Manufacturing ISM (expected at 58.5). A busy start to Q4. Roll on Xmas!!