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Futures Jump Despite BOJ Disappointment, Weak Earnings Offset By Commodities Levitation

The big overnight story was certainly the BOJ's announcement at 11pm Eastern whether or not the Japanese central bank would boost QE. This is how we previewed it: "now all eyes to the BOJ when tonight around 11pm Eastern, Japan's central bank is expected do and say precisely... nothing." Sure enough, nothing is precisely what the BOJ delivered, leading to a big, if brief tumble in the USDJPY suggesting many were expecting at least a little tip from the BOJ.

Furthermore, as bank commentators pointed out not only did the BOJ not ease, it effectively made any further easing at the much anticipated October 30 meeting virtually impossible: quotes Kazuhiko Ogata, chief economist at Credit Agricole in Tokyo, who said the "BOJ’s decision wasn’t a surprise, and its statement doesn’t show any possibility of additional easing on Oct. 30" while Ruling Liberal Democratic Party lawmaker Kozo Yamamoto says he thinks BOJ held off from easing because central bank was worried weaker yen hurts the poor.

But perhaps the most actionable overnight news was that just as the USDJPY was set to crash, Bloomberg said that "Japanese trust banks bought USD/JPY near 119.80 after BOJ left policy unchanged, according to an Asia-based FX trader, after leveraged accounts sold more than $1b under 119.90: trader." In other words, the BOJ did everything it had to - i.e., trading through its preferred channel of trust banks - to prevent the USDJPY from crashing and dragging the S&P down with it. This is precisely what we predicted just after the BOJ announcement:

120 tractor activated

— zerohedge (@zerohedge)

7 hours later the USDJPY is precisely at... 120.


So with the USDJPY locked by the BOJ tractor beam, it meant that ES-correlation algos had to find some other asset class to latch on to, and they did so eagerly by attaching to the only other thing that was rising overnight, namely commodities and specifically crude oil, which is up another 1.75% following yesterday's torrid move, with WTI now approaching $50, the highest price since late July.

The other overnight news - and a key catalyst for the abovementioned jump in commodities - was China's report of its September FX reserve outflows, which in the aftermath of China's Yuan devaluation two months ago, dropped "only" $43.3 billion in September, to $3.514 trillion last month, less than the consensus forecast for a $57.4 billion decline. While the Q3 decline is about $180
billion and makes it the largest ever quarterly fall in Chinese FX reserves, the slowing in liquidations gave some hope that China's intervention is slowing down which would imply that capital outflows are slowing too.

And while that would be good news on the surface, and has led to a dramatic surge in other regional EM currencies, the reality is that China has merely adopted the "Brazilian model" of intervening in FX via derivatives. As Khoon Goh, Singapore-based senior FX strategist at ANZ, said, China’s FX reserves fell by less than by he had expected, and is sharply lower than intervention seen in August, however "PBOC was active in intervention in the forwards as well, which do not get picked up in headline FX reserves data." In other words, the PBOC has discovered yet another way of masking what it is truly doing in FX, which means other sources of data will have to be used to determine just how big China's capital outflow is.

More importantly, unless China's recent fiscal stimulus burst leads to long-term results, which it won't, expect even more currency devaluation followed by even more RRR cuts and other monetary stimulus as China tries to adjust to a new normal slow-growth world.

With these two key events out of the way, Asian equity markets traded mostly higher with the energy sector outperforming following the strength in crude prices. This saw the sector lift the ASX 200 (+0.6%) and Hang Seng (+3.1%), while the Nikkei 225 (+0.8%) initially traded lower on disappointment after the BoJ remained on hold and provided no clues of future easing. Markets in mainland China remained closed for the final day of the Golden Week holiday. JGBs traded lower amid a lack of buying but the pared most of its losses as the BoJ kept monetary policy unchanged as expected.

BoJ kept monetary base unchanged at JPY 80trl as expected and said it is to look out for risks an adjust policy as appropriate. BoJ also added that CPI is likely to be around 0% for the time being, but will continue QQE until 2% CPI is stable.

The release of worse than expected German industrial production data (M/M -1.2% vs. Exp. 0.20%) failed to weigh on sentiment, which instead was buoyed by a raft of positive micro news flow (Euro Stoxx: +1.0%). In particular, SABMiller (+2%) shares surged after Anheuser Busch InBev (+2.0%) raised its offer for SABMiller (+1.5%) to GBP 42.15 per share, however both Co.'s saw shares fall again after SABMiller says latest AB Inbev proposal 'substantially' undervalues the company. While Glencore (+3.5%) shares continued to rebound off recent lows after source reports suggested that Qatar will remain as the largest shareholder following the recent share sale where they purchased 8.9% of the offering. Despite the apparent bounce back in share value over the past few sessions, Glencore bonds continued to trade steady.

In FX, M&A related flow relating to the revised SABMiller bid saw GBP outperform its major counterpart EUR, with GPB further bolstered by higher than expected manufacturing production and industrial production (Industrial Production M/M 1.0% vs. Exp. 0.30%) to see GBP/USD reach its highest level since 23rd September.

JPY traded firmer across the board and ATM vols down 43% at 11.38, largely in reaction to the BoJ refraining from further easing overnight and failing to give any clues over any further extensions of their QQE programme. While commodity sensitive currencies such as AUD, CAD and RUB benefited from the drawdown in API crude oil inventories, as well as the ongoing military action by Russia in Syria.

In commodities, WTI and Brent crude futures continue to edge higher, with WTI trading at its highest level since late July, following a drawdown in API crude inventories ( -1200K, Prey. 4600K) and also as market participants continue to build up war-premium amid the ongoing military action in Syria by Russia. The metals complex has seen gold spend the day in positive territory, briefly breaking above the USD 1150 handle to reach the highest level since September 25 th.

On today's US calendar today we only have consumer credit and MBA mortgage apps, while earnings season continues with reports by include Constellation Brands and Monsanto, who are both scheduled to report pre-market.

Bulletin Headline Summary From Bloomberg and RanSquawk

  • The release of worse than expected German industrial production data failed to weigh on sentiment, which instead was buoyed by a raft of positive equity specific news flow
  • M&A related flow relating to the revised SABMiller bid, alongside positive UK data saw GBP outperform its major counterparts
  • Today's US earnings include Constellation Brands and Monsanto, with participants also looking ahead to DoE crude oil inventories and comments from Fed's Williams
  • Treasuries decline amid global rally in stocks and commodities; this week’s auctions continue with $21b 10Y notes; WI yield 2.085%, lowest since April, vs. 2.235% in September.
  • Janet Yellen is pursuing a monetary policy with echoes from an era of bell-bottom jeans and New York Knicks’ basketball championships. And that’s got some economists worried
  • Bank of Japan Governor Kuroda pushed back against calls for additional monetary stimulus for now, saying that inflation trends are different from a year ago, when he led a divided board to expand easing
  • German industrial production fell 1.2% in August vs expectations for 0.2% gain after a revised increase of 1.2% in July
  • Germany’s leading economic institutes will lower their 2015 growth forecast for Europe’s largest economy to ~1.8% from previous est. of 2.1%, Reuters reports, citing unnamed people
  • U.K. industrial production rose more than economists forecast in August, boosted by gas extraction and the best month for transport equipment since 2011
  • Anheuser-Busch InBev NV offered to buy SABMiller Plc for about £68.2b ($104b), seeking to combine the world’s two largest brewers in a record industry deal after SABMiller spurned two previous proposals made privately
  • Abu Dhabi is reviewing its largest state-owned companies as the slump in crude oil pressures the emirate’s finances, four people with knowledge of the matter said
  • Russia may accept U.S. proposals on coordinating strikes against the Islamic State militants in Syria, a Russian defense official said
  • Vienna’s mayor may be about to become the first politician in Europe toppled by the refugee crisis that is straining relations and upsetting voters from Britain to the Balkans
  • Sovereign 10Y bond yields mixed. Asian and European stocks mostly higher, U.S. equity-index futures rise. Crude oil higher, copper and gold gain

US Event Calendar

  • 7:00am: MBA Mortgage Applications, Oct. 2 (prior -6.7%)
  • 1:00pm: U.S. to sell $21b 10Y notes
  • 3:00pm: Consumer Credit, Aug., est. $19.5b (prior $19.097b)

Central Banks

  • 2:00pm: Fed’s Williams speaks in Spokane, Wash.

DB's Jim Reid completes the overnight news recap

We kick off in Asia this morning and more specifically in Japan where the BoJ has made no change to its monthly asset purchasing target, sticking with its ¥80tn annual target after an 8-1 majority. There has been some speculation that they would increase stimulus today but consensus was that they would stay put for now. The accompanying statement showed that the BoJ continues to see the economy ‘recovering moderately’ but the greater focus will be at Governor Kuroda’s press conference (due at 7.30am BST) for any hints that we may see an increase in stimulus possibly as soon as the next meeting on October 30th. The latest Bloomberg survey is suggesting that it’s set to be a close call with 42% expecting the BoJ to increase purchases at this meeting. We think it’s inevitable they do something soon.

Prior to this we also got wind of the latest FX reserves data out of China. During the month of September, China’s FX reserves shrank by $43.3bn (to $3.514tn), a slowdown relative to the $93.9bn outflow in August but nonetheless more evidence of domestic currency support from the PBoC. More telling is the quarterly drop of $180bn, the most with data going back to 1995 with reserves now at the lowest since July 2013. This is going to be a very important release going forward.

Looking at equity markets in Asia this morning, bourses in Japan are mixed with the Topix unchanged and Nikkei -0.45% although it feels like markets there are in wait and see mode ahead of Kuroda’s press conference. The Yen has firmed a touch, currently +0.3% against the Dollar. Away from Japan, there’s generally a more positive tone across markets this morning. The Hang Seng (+1.10%), Kospi (+0.63%) and ASX (+0.51%) have seen gains, while credit indices in Asia and Australia are 3-4bps tighter.

Moving on. Despite a strong session once again across the board for European equity markets yesterday, with the Stoxx 600 in particular up +0.58% and nudging back towards its mid-September levels, the run of five-consecutive days of gains for the S&P 500 came to a stuttering end last night after a healthcare driven sell-off saw the index close -0.36%. That selloff weighed on the Nasdaq (-0.69%) too although the Dow (+0.08%) chopped around before eventually finishing just about in positive territory.

The rout in biotech names was in stark contrast to a strong day for energy stocks globally after a decent leg up for WTI (+4.91%) and Brent (+5.42%), the latter closing back above $50/bbl for the first time since September 8th with both markets up another 1% this morning. Yesterday’s surge appeared to be as a result of a couple of factors. The EIA noted that US crude production fell 120k barrels a day in September, while comments from the Shell CEO Van Beurden also seemingly played a part after he suggested that the first signs of recovery in the market are starting to appear and that higher prices should soon start to emerge on the back of higher demand.

Away from the moves in Oil, the other focus of attention yesterday was on the data and specifically the August trade balance number out of the US. The print confirmed a widening in the deficit by nearly $7bn to $48.33bn (vs. $48.0bn expected) and to the widest level since March this year. As expected a stronger dollar weighed on net exports, with exports down -2% mom during August and falling to the lowest level since June 2011. At the same time, imports rose +1.2% mom while the trade-weighted dollar reached a 12-year high.

The confirmed weaker US trade numbers led our economists to cut their GDP forecasts for Q3 and Q4. The former reduced from 3.0% to 1.7%, and the latter trimmed from 3.0% to 2.3%. This has the effect of lowering 2015 real GDP growth, as measured on a Q4 over Q4 basis, from 2.6% to 2.1%. They think the recent deterioration in net exports is likely to be long lasting. Slower overseas growth is weighing on the demand for US-based products, and a strengthening dollar is boosting the demand for imports. They have cut 2016 to 2.7% from 3%. With that, they have also pushed out their forecast for a Fed hike to next year, starting in March with a 25bp hike and then followed up in June with another 25bp move. That puts their view more closely aligned with market pricing at the moment, with the probability of a move by March next year currently sitting at 57% while December continues to hover around the mid-30s (currently 36%). Despite the market pricing in a low expectation of a move this year, the Fed’s Williams once again reiterated his call that a hike this year ‘makes sense’, also stating that he expects the tightening process to be the most gradual in the history of the Fed.

Meanwhile and speaking of forecast changes, the IMF weighed in yesterday with their own after downgrading their outlook for global growth this year to 3.1% from a forecast of 3.3% made back in July. The Fund has also revised down its 2016 forecast to 3.6% from 3.8%, highlighting the continued slowdown concerns in China and emerging markets in particular.

Away from the trade data, the other data out in the US yesterday was the IBD/TIPP economic optimism survey for October which jumped 5.3pts in the month to 47.3 (vs. 44.5 expected) and to the highest level since July. Prior to this in the European session, there was some surprising weakness in German factory orders which fell -1.8% mom in August (vs. +0.5% expected) and saw the July reading revised down in tandem. Our colleagues in Europe noted that core orders in Germany are now down a cumulative 5.1% over the last three months, the weakest such period since March 2009.

Staying in Germany and on one of the hot topics at the moment, new VW CEO Matthias Mueller said in a statement to the company’s employees yesterday that the carmaker is prepared to slash or postpone any projects or spending that ‘is not absolutely necessary’ and that VW would ‘save massively to manage the consequences of the crisis’. In a separate interview with German newspaper FAZ, the CEO states that if all goes to plan, the company expects to start recalling cars in January with all cars fixed by the end of 2016. In the meantime, VW’s top US executive is due to meet with the US Energy and Commerce Committee tomorrow in Washington which formally kicks off the congressional probe. On top of this, we’re also expecting the carmaker to submit to Germany’s transport authority plans showing that VW’s diesel vehicles will be set to comply with exhaust regulations going forward. Plenty to keep a close eye on.

Taking a look at the day ahead now, it’s a busier day for data in Europe this morning with German industrial production, French trade data and UK industrial and manufacturing production readings all due. Over in the US it’s a lot quieter with just the August consumer credit print expected. Meanwhile the Fed’s Williams is due to speak again