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Stocks, Futures Soar As Europe Joins Japan In Deflation, Surge Driven By Hopes For More Japan, ECB QE

Terrible economic news is wonderful news for markets, all over again, and with the worst S&P500 quarter since 2011 set to close today, some horribly "great" news is just what the window-dressing hedge funds, most of whom are deeply underperforming the broader market (not to mention Dennis Gartman) ordered.

Days after Japan returned to deflation for the first time since 2013, confirming Abenomics 1.0 was a failure (hence Abe's launch of Abenomics 2.0 which will be even worse)...

... and after reporting even more abysmal industrial production and retail sales data, which in turn prompted a bevy of banks to cut their Q3 GDP forecasts to negative (JPM now expected Q3 GDP of -1.0%) and unleash yet another technical recession for Japan, the fifth since the financial crisis, the Yen plunged following the latest round of loud, renewed calls for a boost to the BOJ QE, and JPM in fact made the October 30 BOJ meeting its base case for further central bank easing. Abe advisors Honda and Takenaka both confirmed more BOJ easing is just a matter of time, as a result pushing the USDJPY solidly above the market critical 120 level.

And then, just a few hours later, we got the latest inflation, or rather deflation, data out of Europe, where consensus hoping for an unchanged print was once again disappointed when the September CPI print came in negative once again on the back of a drop in commodity prices, confirming the latest inflationary impulse from the March launch of QE is officially over.

As a result of Europe's relapse into deflation, hours ago S&P announced that it believes the ECB will more than double its QE program from €1.1bn to €2.4 bn: "We believe the ECB will extend its QE program beyond September 2016, most likely until mid-2018, and that it could reach €2.4 trillion--more than twice the original €1.1 trillion commitment."

Nothing new here, just more people piling onto the more stimulus train before this too fail, and the now inevitable monetary paradrops begin.

Finally, jumping on board the "moar stimulus" train, was China which whose central bank and banking regulators just announced today that down payment requirement for first mortgage will be lowered from 30% to 25%, while additionally China would also cut in half the taxes on small car purchases in a bid to stimulate its sputtering auto market. How this latest attempt to reflate the previously burst housing bubble will help the proper allocation of capital is anyone's guess, but for now markets are loving this trifecta of "bad news is good news" from around the globe, even as such "hawks" as Bill Dudley and Janet Yellen are set to speak later today in the US.

Looking at markets it was blast off from the beginning entirely on the back of the diagonal move in the USDJPY: Asian equity markets traded mostly higher as they rebounded from yesterday's substantial declines. The Nikkei 225 (+2.7%) recovered from 8-month lows and yesterday's 4% slump, to return back above 17,000 as JPY softened, while the ASX 200 (+2.1%) was lifted by strength in large banks. Shanghai Comp. (+0.5%) was supported by gains in the auto sector, after China announced it is to halve taxes on small car purchases. JGBs tracked the losses seen in USTs on the last day of fiscal H1 trade amid gains in equities with investors side-lined until tomorrow's 10yr auction, while the BoJ entered the market to purchase JPY 1.18trl as expected.

Equities in Europe traded higher since the open (Euro Stoxx: +2.4%), largely in reaction to stock specific news flow, which in turn meant that Bunds traded lower, albeit marginally. Glencore (+11.0%) shares surged as it continued to reaffirm that it is financially sound, while VW (+2.7%) shares advanced in reaction to reports that China is to halve taxes in small car purchases, together with WSJ reports, which suggested that the company could avoid criminal prosecution. At the same time, shares of UK retailer Sainsbury's jumped over 10% after it said full-year profits were set to be better than expected.

Bonds are understandably weaker as T-Notes head into the pit open firmly in negative territory in line with the pickup in sentiment and strength in global equities , while over in Europe the latest LTRO auction saw ECB allot EUR 11.842bIn with 92 bidders and long end peripherals have outperformed after long end Bunds have lead the way lower throughout the European morning.

In commodities, softness in the metals complex has been observed in early European trade, weighed upon by a stronger USD with platinum set for its worst performing quarter in nearly seven years, on fears of falling demand from the VW scandal, while gold is set for its worst quarter in nearly a year as participants continue to look ahead to a Fed rate hike. Elsewhere Brent and WTI crude futures have pared back some of yesterday's losses after API crude oil inventories showed a build of 4600K (Prey. drawdown on 3700K), seeing the 2nd biggest weekly build in over 5 months.

In FX, month and quarter-end related flows proved supportive for the USD index, which in turn ensured that USD/JPY reclaimed 120.00 level, while EUR/USD was also weighed on by carry related flows amid better bid stocks, as well as lower EUR/GBP amid a large payment from the EU to UK farmers. Elsewhere, despite the mixed performance by energy and metals markets, commodity sensitive currencies rose, in part benefiting from the alleviation of fears regarding the future of the troubled mining and trading giant Glencore. While the upside by NZD was aided by comments from Westland Milk who lifted their 2016 forecast pay-out and said they see some signs of increasing demand and price recovery.

On today's US calendar, we have the Milwaukee ISM (expected to improve to 48.5), the Chicago Purchasing Managers index (expected to fall to 53) and the September ADP employment change number (expected in steady at 190k) to set us up nicely for Friday’s NFP number. We also have a fair amount of Fed speak with Dudley, Bullard and Yellen all scheduled to opine on things with the latter two due to make opening remarks at the Fed’s annual Community Banking conference.

* * *

Bulletin Headline Summary from Bloomberg and RanSquawk

  • Month and quarter-end related flows support the USD to see USD/JPY break back above 120.00
  • Equities in Europe trade higher since the open (Euro Stoxx: +2.4%), largely in reaction to stock specific news flow, which in turn meant that Bunds trade lower, albeit marginally
  • Today sees the release of the latest US ADP employment change report, Chicago PMI and the weekly DOE inventories update as well as comments from Fed's Dudley, Yellen and Brainard
  • Treasuries drop in overnight trading as equity markets see robust gains as ECB begins to debate expanding QE after consumer prices declined y/y.
  • Glencore has recouped most of the losses from Monday’s 29 percent plunge as the shares rebounded for a second day on higher metal prices and speculation the stock is cheap
  • Glencore is unlikely to lose access to its $15 billion of syndicated loans, even as liquidity concerns weigh on its stock and bond prices, according to Macquarie Group
  • Chesapeake Energy is letting go of about one in six employees, the latest blow to a workforce that enjoyed boom years under shale wildcatter Aubrey McClendon and shrank since his departure as the natural gas producer grapples with a downturn
  • A key gauge of wealth in Britain has risen above its pre- recession peak and workers are seeing their compensation grow at the fastest pace in eight years
  • China cut the minimum down payment requirement for first- time homebuyers, stepping up support for the property market amid an economic slowdown
  • Sovereign 10Y bond yields mostly higher. Asian and European stocks gain, U.S. equity-index futures gain. Crude oil drops, copper rises, gold lower

US Event Calendar

  • 7:00am: MBA Mortgage Applications, Sept. 25 (prior 13.9%)
  • 8:15am: ADP Employment Change, Sept., 190k (prior 190k)
  • 9:00am: ISM Milwaukee, Sept., est. 48.5 (prior 47.67)
  • 9:45am: Chicago Purchasing Manager, Sept., est. 53 (prior 54.4)

Central Banks

  • 8:30am: Fed’s Dudley speaks in New York
  • 3:00pm: Fed’s Yellen, Bullard speak in St. Louis
  • 8:00pm: Fed’s Brainard speaks in St. Louis

DB's Jim Reid completes the overnight wrap

Its been an action packed last two weeks in markets and there's plenty to consider what with the Fed, VW, Glencore and a general uneasiness in markets all contributing to the risk off. I'll be trying to make some sense of it all in tomorrow's EMR with some comments so watch this space.

For now today ends what is likely to be one of the worst quarters for global risk for 4 years and at the moment we're all looking for the catalyst as to what brings this extended period of volatility and uncertainty to an end. Yesterday was a quieter day but despite there being little in the way of new news or headlines, the S&P 500 capped a 1.5% intraday range but finally snapped five days of consecutive losses and nudged into positive territory in the final minutes of trading, closing up a modest +0.12% after being supported by a rebound in healthcare names. That was after having traded between gains and losses over a dozen times during the session. Credit markets, or more specifically primary markets continue to be weighed down by the lack of stability with yesterday case in point after no deals were done in the Dollar market and up to six issuers were said to have stood down in the European session.

Volatility was the dominating feature for European equity markets as well and despite buyers re-emerging for Glencore and sending the stock soaring +17%, the Stoxx 600 failed to fully recover from an early 2% fall, eventually closing -0.69%. There were similar falls for other DM bourses but it’s the peripherals which are outperforming at the moment with the Spanish IBEX in particular having closed the session flat. VW tumbled another 4% but much of the focus in Germany was on a disappointing headline CPI, stoking the ECB stimulus fire some more.

More on that shortly, but refreshing our screens this morning, the risk tone is generally firmer in Asia as we prepare ourselves for quarter end. The Hang Seng, HSCEI and Shanghai Composite indices are up +1.4%, +2.4% and +0.7%, respectively as we go to print. The KOSPI (+0.3%) resumed its trading session with modest gains while interestingly the Nikkei (+2.6%) is doing well despite some weak industrial data. Japan’s industrial production fell unexpectedly (-0.5% mom v +1.0% expected) in August. Retail sales were also flat month-over-month versus consensus forecast of a 0.5% gain. The disappointing data perhaps strengthens the case for more policy stimulus in Japan. Turning to credit markets, new issuance activity in has been fairly muted in Asia which has been a trend for some time now given the uncertainties around EM Asia/China although it does seem that the onshore CNY bond market is offering Chinese corporate an alternative source of funding. Secondary credit spreads retraced some of the widening yesterday with Asia iTraxx and benchmark IG cash spreads around 3-5bps tighter as we type. The UST 10yr yield is a smidgen higher but still wrapped around the 2.06% area as we type.

Back to markets yesterday. The highlight of yesterday’s economic data was out of Germany where more energy-price related weakness resulted in the headline September CPI reading falling a greater than expected -0.2% mom (vs. -0.1% expected). That was enough to nudge down the annualized rate two-tenths to 0.0% (vs. +0.1% expected) while the harmonized rate dipped into negative territory at -0.2% yoy, heightening concerns for today’s Euro area inflation reading. Despite the softer than expected headline reading, our colleagues in Europe calculate the core print to have remained stable around +1.2% yoy, which is easily inside the tight band it has stayed in since 2012. ECB Governing Council member, Weidmann, speaking shortly after the data said that the ECB should ‘look through’ the energy-price swings on inflation, saying also that deflation fears are overstated and have instead dissipated. Its probably fair to say he is again not in an immediate rush to vote for more QE!

Away from this, Euro area consumer confidence was unchanged at the final reading for September as expected at -7.1. There was better news elsewhere however with better than expected indicator prints for economic (105.6 vs. 104.1 expected), business climate (0.34 vs. 0.21 expected), industrial (-2.2 vs. -3.8 expected) and services (12.4 vs. 10.0 expected) confidence. Meanwhile, over in the UK we saw mortgage approvals tick up 2k to 71k (vs. 69.8k expected) in August.

Over in the US, the highlight of the dataflow was the September consumer confidence reading which rose 1.7pts to 103.0 (vs. 96.8 expected), driven by the present situation index, and to the second-highest level in eight years. Elsewhere, the July S&P/Case Shiller house price index declined 0.2% mom in July after expectations for a slight rise of +0.1%. A downward revision to the previous month however saw the annualized rate nudge up slightly to +4.96% (vs. +5.15% expected). Meanwhile, speaking to the Nikkei, Cleveland Fed President Mester largely re-affirmed what we already knew in saying that the decision of the Fed to ‘not raise rates in September was really a decision about risk management’.

Looking to the day ahead and it looks set to be a busy one. In the UK we have the latest house price data (with the rate of appreciation expected to rise to +3.8% YoY), the latest consumer confidence (expected to fall) and the final read on Q2 GDP (no change expected). We have the latest CPI inflation from Italy (expected to fall to +0.3%) and the Euro area (expected to fall to 0%). The Euro area core inflation is expected to remain steady at +0.9%. We also have September unemployment from Germany (expected in steady at 6.4%), Italy (expected steady at 12%) and the Euro area (expected at 10.9%). We also have the August retail sales number from Germany (expected steady at +3.3%) and French consumer spending. Over in the US we have the Milwaukee ISM (expected to improve to 48.5), the Chicago Purchasing Managers index (expected to fall to 53) and the September ADP employment change number (expected in steady at 190k) to set us up nicely for Friday’s NFP number. We also have a fair amount of Fed speak with Dudley, Bullard and Yellen all scheduled to opine on things with the latter two due to make opening remarks at the Fed’s annual Community Banking conference.