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Dollar Regains Most Of Yesterday's "Flash Crash" Losses. Oil Resumes Slide; 10Y Under 2%

If it was the Fed's intention to slow down the relentless surge in the dollar with yesterday's "impatient" removal which blamed the dollar strength on the "strength" in the US economy, it promptly failed after algos and a few carbon-based traders looked at the Atlanta Fed and realized that a 0.3% Q1 GDP print is anything but "strong." As a result the EURUSD, after soaring by nearly 400 pips yesterday in a market reminiscent of a third-world FX pair's liquidity especially following the previously noted USD flash crash, the dollar has recoupped nearly all losses, and the DXY is once again on the way up and eyeing the resistance area of 100.

Of course, the only Fed intention was to push stocks higher, where it certainly succeeded compliments as usual of Citadel, and the S&P futures are flat since yesterday's epic surge, which saw the market move from red to the year to just shy of all time highs. So as Larry Kudlow said "Just enjoy it: stocks are going up."

One place where the resumption in dollar strength, however, has promptly manifested itself, is the price of crude, which soared yesterday as EURUSD rate differentials sent it soaring, At last check, WTI had fallen back to $43/bbl as focus returns to U.S. supply glut that saw prices fall to 6-yr low yday before FOMC policy statement gave prices a boost in U.S. afternoon. Yesterday’s gain ended a six-day losing streak. Today, Brent futures down less, allowing premium to WTI to widen toward $10. U.S.

"Markets had anticipated a stronger commitment from the Fed to start the interest rate hike sooner-rather-than-later; as this did not happen, the dollar weakened,” says Global Risk Management oil risk manager Michael Poulsen. “The weaker dollar made dollar-priced commodities, such as oil, increase." Not for long though, and as the math turns to how long it takes before the US runs out of oil storage capacity, the bigger "June countdown" is not to the next FOMC meeting, but when in June the US will no longer be able to warehouse any unusued oil (as presented first here).

Another asset class that has seen a far stickier response to the Fed's statement in addition to stocks were bonds, with the US 10Y trading well under 2.00% again, even as the German Bund plunged just off record lows, and was at  0.18% at last check. Still, this is well above the negative print we (jokingly) predicted the German 10Y paper would see within 48 hours of the FOMC statement.

But one place whose assets are not benefiting from the Fed's generosity at all, and which inexplicably trade with something called "risk" is Greece, whose 10 Year continues to surge, and was at 11.3% at last check, the widest since 2013, as fears the country may actually really Grexit this time around get louder and more credible by the day.

Unlike other asset classes, European equities have held relatively steady in the wake of the FOMC release. Stocks in Europe were left relatively unphased by the more dovish than anticipated Fed release as the subsequently stronger EUR would not do the European export sector any favours, therefore over-looking the move higher in US stocks. On an index specific basis, the DAX initially saw some underperformance following a downbeat update from Siemens which has subsequently weighed on the index-heavyweights shares. Elsewhere, the FTSE MIB outperforms on bid speculation for Pirelli and the FTSE 100 is being supported by miners after the move higher in metals markets yesterday. In fixed income markets, USTs have held steady at their post-FOMC best levels, while Gilts lead the way higher in a catch up play from the early UK close. In terms of macro news, according to sources, the ECB have approved EUR 400mln extension to their ELA programme, although this figure is reportedly not as much as had been requested by the Greek central bank. As such, focus on Greek/Europgroup negotiations still remain in vogue and the Greek 10yr yield resides at its highest level in a month.

In the 3rd TLTRO the ECB allotted EUR 97.848bln vs. Exp. EUR 40bln, which given the potential uptick in Eurozone liquidity saw EUR/USD tick lower by just under 20 pips, while modestly lifting Bunds and Euribor.

Asian equities traded mostly higher in the wake of the FOMC statement with the exception of the Nikkei 225 (-0.35%) which was weighed on by the subsequent JPY strength. However, Japanese stocks have since narrowed the losses on news that three large Japanese pension funds who manage around USD 250bln of assets will move funds away from fixed income markets and into equities, in addition to USD/JPY recovering as the session progressed. The ASX surged overnight as participants factored in the implications of lower rates for their domestic economy, with the index also supported by higher basic material prices.

FX markets have seen the greatest source of traction, with the USD-index (+1.2%) paring a bulk of yesterday’s significant slide, much to the detriment of its major counterparts with EUR/USD down in excess of a point. Today has once again also been another one for the central banks with the SNB keeping rates on hold at -0.75% as expected, although EUR/CHF was weighed on as some participants had been looking for the SNB to cut rates further. Elsewhere, the NOK has seen a dramatic strengthening against EUR after the Norges Bank unexpectedly kept rates on hold despite their Scandinavian counterpart Sweden cutting rates yesterday and increasing their bond-buying programme.

In the commodity complex, price action for Brent and WTI has largely been swayed by the aforementioned stronger USD. As such WTI crude futures trade lower by around USD 1.50, although still remain north of their lows heading into the Fed meeting. Spot gold and silver nonetheless still reside in close proximity to their post-FOMC levels given the attractiveness of gold as an inflation-hedge, with commodity newsflow otherwise light.

In summary: European stocks head toward highest level since 2000 after Fed said data indicated economic growth has moderated, fueling speculation it won’t be in a rush to raise interest rates. SNB keeps deposit rate at record low, Norway signals reduction after unexpectedly holding rate. Siemens sees ‘soft’ industrial business profit margin in 2Q. The Italian and Swedish markets are the best-performing larger bourses, German the worst. The euro is weaker against the dollar. Japanese 10yr bond yields fall; German yields decline. Commodities decline, with WTI crude, Brent crude underperforming and nickel outperforming. U.S. jobless claims, continuing claims, Bloomberg consumer comfort, Bloomberg economic expectations, Philadelphia Fed index, leading index, current account balance  due later.

Market Wrap

  • S&P 500 futures down 0.2% to 2087.4
  • Stoxx 600 up 0.7% to 401.3
  • US 10Yr yield up 2bps to 1.94%
  • German 10Yr yield down 1bps to 0.18%
  • MSCI Asia Pacific up 0.8% to 147.1
  • Gold spot down 0.1% to $1165.9/oz
  • 71.2% of Stoxx 600 members gain, 26.7% decline
  • Eurostoxx 50 +0.2%, FTSE 100 +0.3%, CAC 40 +0.2%, DAX +0.1%, IBEX +0.4%, FTSEMIB +0.8%, SMI +0.4%
  • MSCI Asia Pacific up 0.8% to 147.1, Nikkei 225 down 0.3%, Hang Seng up 1.4%, Kospi up 0.5%, Shanghai Composite up 0.1%, ASX up 1.9%, Sensex down 0.2%
  • Euro down 1.72% to $1.0677
  • Dollar Index up 0.3% to 98.85
  • Italian 10Yr yield down 5bps to 1.26%
  • Spanish 10Yr yield down 5bps to 1.22%
  • French 10Yr yield down 2bps to 0.45%
  • S&P GSCI Index down 0.3% to 394.8
  • Brent Futures down 0.8% to $55.4/bbl, WTI Futures down 3% to $43.3/bbl
  • LME 3m Copper up 1.8% to $5771.5/MT
  • LME 3m Nickel up 1.8% to $13750/MT
  • Wheat futures up 0.2% to 511.8 USd/bu

Bulletin headline summary

  • European equities trade higher alongside a pullback in EUR strength, much to the benefit of the European export sector
  • SNB (as expected) and Norges Bank (unexpectedly) hold fire on cutting rates
  • Looking ahead, today sees the release of the weekly US jobs data and potential comments from Fed’s Tarullo
  • Treasuries modestly lower, paring some of gains seen yesterday after FOMC reduced estimates for how much fed funds rate is likely to rise this year and next, forecasts for GDP and PCE inflation.
  • Behind the Fed’s wary stance is a surge in USD, triggered in part by easier monetary policies abroad, and which is repressing already too-low U.S. inflation while restraining economic growth
  • The ECB raised the maximum amount of emergency liquidity available to Greek lenders by EU400m, less than the Greek central bank requested, people familiar with the decision said
  • Greek Prime Minister Alexis Tsipras heads to a EU summit hoping for a political breakthrough as German Chancellor Angela Merkel works to regain control over efforts to keep the euro- area together
  • U.K. PM Cameron will arrive in Brussels Thursday seeking to burnish his credentials as the best person to fight for British interests in the European Union during the bloc’s final summit before the May 7 U.K. election
  • Norway’s central bank unexpectedly left rates unchanged and signaled it’s prepared for more pronounced monetary easing to protect the economy against a plunge in oil prices
  • SNB President Thomas Jordan pledged to keep interest rates at a record low to weaken the franc after acknowledging that dropping his defense of the currency added to challenges for the economy
  • Sovereign 10Y yields mostly lower; Greece 10Y +21bps to 11.48%. Asian stocks mostly higher, European stocks gain, U.S. equity-index futures decline. Crude and gold lower, copper rises

US Event Calendar

  • 8:30am: Current Account Balance, 4Q, est. -$104.9b (prior - $100.3b)
  • 8:30am: Initial Jobless Claims, est. 293k, March 14 (prior 289k); Continuing Claims, March 7, est. 2.400m (prior 2.418m)
  • 9:45am: Bloomberg Consumer Comfort, March 15 (prior 43.3);  Bloomberg Economic Expectations, March (prior 54)
  • 10:00am: Philadelphia Fed Business Outlook, March, est. 7.0; (prior 5.2)
  • 10:00am: Leading Index, Feb., est. 0.2% (prior 0.2%)

DB's Jim Reid as customary concludes the overnight summary

The Fed divorced itself from its previous rate forecasts with a pretty major down-scaling of their dots. YE 2015 was cut 50bps to 0.625%, 2016 was cut 63bps to 1.875% and 2017 was reduced 50bps to 3.125%. These have been looking odd for sometime given where the market was and the international trends (easing across the globe) and the likelihood of negative inflation over the summer. However even though the Fed moved, the market also moved with Dec 15, 16 and 17 futures contracts falling 20bps,18bps and 19bps to imply rates at 0.4%, 1.1% and 1.7% respectively at the end of the next 3 years. So the dots were probably the main story as the dropping of patient was expected. Outside of this not much has really changed as the Fed will still be data dependent but it’s becoming increasingly apparent that inflation is gaining more Fed attention relative to employment, especially as the Fed also marked their longer-run unemployment rate down (i.e. suggesting more slack than previously thought). Overall we continue to think a rate rise in 2015 will still be tough with headline inflation likely to be negative all summer and markets likely to take fright as a hike comes into view. One word of caution to this view would be if we have more days like yesterday where we saw a sizeable dollar correction and a commodities rally. If sustained then the inflation outlook might recover more quickly. So nothing is preordained.

Our view has long been that European equities would out-perform US through all of 2015. However if the Fed end up pushing back rate rises more and more, the pace of this trade will likely slow. We don't think it reverses as Europe still have the upper hand with heavy QE but the easy part of the trade might be over given the move to a more dovish Fed. Maybe the trades that have worked well in 2015 might get a bit more two-way flow now that there are some doubts about the Fed.

Indeed the currency reversal was one of the highlights post Fed. The Euro had traded below $1.06 before the US market opened but a few hours later and after the FOMC it hit a high of $1.104 before settling down and closing at $1.086 (+2.52%) which is roughly where it is now. The broader DXY closed 1.04% weaker and has declined another 0.3% this morning. Amazingly, the intraday high to low range for the Euro was 4.4% which is the second highest on record since the commencement of the single currency in 1999. In fact, it was higher than any move we saw during the height of volatility in 2008/09 and second only to the move in September 2000 when we had the coordinated Central Bank intervention to support the Euro. Equity markets bounced with the S&P 500 closing +1.22% yesterday having traded some -0.6% intraday in the run up to the statement and credit markets rallied also with CDX IG 3bps tighter. There was a significant move in Treasuries too with the rally led by the belly of the curve with 5y (-16.5bps) and 10y yields (-13.1bps) rallying to 1.39% and 1.92% respectively. The latter is now back at early February levels. Commodity markets rebounded also, led by oil with WTI (+2.76%) and Brent (+4.49%) rallying hard. Gold (+1.57%) temporarily halted a recent slide with the largest single day rise since January 30th.

Quickly refreshing our screens this morning, most major bourses are trading firmer in Asia. The Shanghai Composite (+0.27%), Hang Seng (+1.31%) and Kospi (+0.40%) in particular are following the US lead. The Nikkei (-0.43%) is the exception, not helped by yesterday’s rally in the Yen. The better sentiment has helped fuel a rally in Asian credit too. The iTraxx Asia is 4bps tighter while 5y CDS in China (-5bps), Indonesia (-9bps) and Malaysia (-8bps) are firmer.

Back to yesterday, although something of a sideshow, there were contrasting moves in European sovereign bond markets with 10y benchmark yields in Germany (-8.5bps) and France (-6.3bps) rallying, but peripheral yields selling off some 2-10bps – perhaps reflecting the renewed Greece concerns. The sell-off in Bunds over the previous four days has in fact now been wiped out with yesterday’s rally with the 10y hitting a new record low at 0.197% - closing below 0.2% for the first time. Equity markets were more mixed on the other hand. The Stoxx 600 (+0.33%) closed firmer while the DAX (-0.48%) declined and peripheral markets were largely mixed.

Data was focused in the UK where readings were generally in line. The ILO unemployment rate was unchanged at 5.7% yoy and the claimant count ticked down a tenth of a percent to 2.4% yoy. Average weekly earnings were on the weaker side however with the 1.8% yoy reading below expectations of 2.2%. In terms of yesterday’s Budget, DB’s George Buckley noted that overall it did little to change the fiscal picture. Rather, the Chancellor delivered a number of electoral sweeteners that were broadly offset by plans to clamp down on tax evasion, among other measures, resulting in a broadly neutral budget over the forecast horizon. Meanwhile the Office for Budget Responsibility upgraded the growth forecasts for the UK by a relatively modest 0.1% in 2015 and 2016 to 2.5% and 2.3% respectively.

Focus today could well be on Greece where PM Tsipras is due to meet with the ECB’s Draghi, Germany’s Merkel, France’s Hollande and the EC’s Juncker on the sidelines of the EU summit. Yesterday we heard that the ECB had approved an increase in the ELA ceiling for Greek banks for €400bn while the government auctioned €1.3bn of T-bills ahead of the upcoming February maturities. Despite beginning technical discussions, progress so far appears to be limited with tensions between Greece and the German government continuing to run high. DB’s George Saravelos notes that this, along with the diminishing cash position for the Greek government is only adding to the continued concerns. Clearly a lot still needs to be done with a resolution still far from certain. A successful conclusion first of all to the current program review needs to be completed followed by this being passed through Greek parliament via legislation, which in turn would allow funding to be disbursed.

Recent talks on the European side of potential capital controls and also talks on the Greece side of a possible referendum highlight the delicate situation. George now puts equal probability on each of the three possible outcomes; 1) No agreement and suspension of ECB financing, 2) Full agreement followed by parliamentary ratification and 3) Reluctant agreement followed by a referendum. Clearly a lot of uncertainty lies ahead.

Just wrapping up Europe, there was more focus on Sweden yesterday when the Riksbank – in an unscheduled move - cut its repo rate deeper into negative territory, lowering the rate 15bps to -0.25% having previously eased last month. At the same time the Central Bank quadrupled its quantitative easing programme to 40bn Kronor as inflation continues to run well below target. The Kronor weakened 1.27% versus the Euro yesterday following the move.

Yesterday ahead of the roll to series 23 of the iTraxx indices we published a note looking at how the new series compares with the previous series looking at the rating and geographical breakdown of the indices as well as assessing where spreads should broadly trade on the new indices. The roll to the new Main series provides us with the greatest changes as the index replaces 5 consumer names with 5 financial names, increasing the number of financials to 30. The FV levels for the new series 23 indices are around 57bps, 59bps, 139bps and 279bps for the Main, Financial Senior, Financial Sub and Crossover indices respectively with the FV roll levels broadly in the region of +6bps, +4bps, +4bps and +7bps for the same indices respectively.

It’s a quiet calendar in Europe this morning with no notable releases to speak of. However the EU leaders summit could well generate some Greece-related headlines. In terms of the first data releases post FOMC this afternoon, we’ve got jobless claims, the February leading index and also the Philadelphia Fed business outlook to look forward to.