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Futures At Overnight Highs On China PMI Miss, Europe PMI Beat

It is a centrally-planned "market" and everyone is merely a bystander. Last night, following a dramatic China PMI miss, which as previously reported tumbled to the worst print since early 2014 and is flashing a "hard-landing" warning, the Shanghai Composite first dipped then spiked because all a "hard-landing" means is even more liquidity by the PBOC (which as we suggested a month ago will be the last entrant into the QE party before everyone falls apart). Then, this morning, a surprise beat by the German (and Eurozone) PMI was likewise interpreted by the algos as a catalyst to buy, and at this moment both European stock and US equity futures are their session highs. So, to summarize, for anyone confused: both good and bad data is a green light to buy stocks. In fact, all one needs is a flashing red headline to launch the momentum igniting algos into a buying spasm.

Some more on the just announced Eurozone PMI numbers:

From Goldman:

The Euro area flash composite PMI rose by a robust 0.8pt to 54.1 in March, above our and consensus expectations of a more modest gain (Cons: 53.6, GS: 53.8). The expansion in the composite PMI was driven by similar robust gains in both the manufacturing and services subcomponents. The German flash composite PMI increased notably, while its French counterpart eased slightly after a strong gain in February.

  1. The expansion in the Euro area flash composite PMI was driven by similar stronger-than-expected increases in both the manufacturing PMI and the services PM; the manufacturing PMI showed a 0.8pt gain in March to 51.9 (Cons: 51.5) and the services PMI rose by 0.5pt to 54.3 (Cons: 53.9) (Exhibit 1).
  2. The breakdown of the March flash PMI release was positive. New orders rose by 1.3pt while stocks edged down by 0.8pt, leading to a solid 2.0pt increase in the stock-order difference. Other subcomponents of the manufacturing PMI were also on the positive side, with output and employment rising to 53.5 (+1.4pt) and 51.2 (+0.5pt) respectively. For services, the forward-looking subcomponents (which are not part of the headline services PMI figure) showed 'incoming new business' rising by a sizeable 2.9pt to 54.6, while 'business expectations' eased slightly by 0.3pt to 63.9.
  3. In addition to the Euro area aggregate PMI, Flash PMIs were released for Germany and France. The German composite PMI came in stronger than expected at 55.3 (Cons: 54.1). This was driven by a notable 1.3pt expansion in the manufacturing PMI as well as a 0.6pt increase in the services PMI. The French composite PMI fell slightly by 0.5pt to 51.7 in March, a touch weaker than expected (Cons: 51.9). The French PMI decline in March follows a forceful 2.9pt increase in February and was driven by a 0.6pt fall in the services PMI (to 52.8) outweighing a 0.6pt increase in the manufacturing PMI (to 48.2).
  4. The area-wide figure released today (as well as the German and French equivalents) suggests around a 1.0pt decline in the services PMI in Italy and Spain, and a 1.3pt improvement in the Euro area manufacturing PMIs outside Germany/France.
  5. Based on historical correlations, a reading of 54.1 is associated with +0.5%qoq (non-annl.) GDP growth. Our CAI points to small real GDP growth out-turn (+0.3%). Our judgmental GDP forecast remains at +0.4%qoq for Q1 (Exhibit 3).

So with any "favorable" data being cherrypicked at will, it was only expected that with this week's latest API data on deck which is set to report anothet massive inventory build, that oil would rise, on however one wished to interpret the overnight data. WTI, Brent up for 2nd day amid weaker dollar and better-than-expected manufacturing data in Germany and Eurozone offset speculations of another build in U.S. crude stockpiles. Median est. in Bloomberg survey of EIA shows build of 4.75m bbl. Euro-zone PMI data “slightly positive but mainly as a result of the good German data -- low oil prices giving Germany a boost,” Michael Hewson, analyst at CMC Markets. “With China and Japan showing some weakness in their economies upside likely to remain capped in the short term." Well, not if it is seen as a signal of imminent more easing.

Looking at Asian stocks, these traded mostly lower following a lacklustre Wall Street close which saw the S&P 500 finish relatively flat, after touching within 4-points of its record high. The Hang Seng and Shanghai Comp both fell in the wake of a poor Chinese HSBC Mfg. PMI release, with the headline contracting to an 11-month low (49.2 vs. Exp. 50.5 (Prev. 50.7). The Nikkei 225 also fell amid JPY strength after the currency posted back to back gains against the USD, while ASX 200 was the only index to trade in the green buoyed by basic materials.

The USD has once again been this morning’s driver after breaking below yesterday’s low print and testing the low hit in the wake of last week’s FOMC statement at 96.63. Renewed selling pressure in the currency lifted EUR/USD to fresh highs and the pair tested 1.1000 as shorts continue to be squeezed out. At the same time as these moves this morning, the DAX rallied off lowest levels to fresh highs ahead of the German PMI reading which beat expectations and caused a further lift in equities and the EUR. Despite all this newsflow has been on the light side - markets have largely overshadowed weaker than expected Chinese PMI overnight and continue to digest and consolidate moved seen last week and what the latest policy statement means for global markets.

Fed's Fischer (Voter, Dove) said rate lift-off is probably justified before end-2015, but lift-off in June, September or a different
month depends on data. (BBG) Separately Fed's Williams (Voter, Dove) reiterated his view that rates will start to rise this year and
the Fed will lift them gradually, said that the US economy can handle a strong USD. (BBG)

UK traders were keenly awaiting this morning’s inflation data, however despite a lower than expected headline which came in flat at 0 and at the lowest since series began, GBP only saw minor weakness as several expected an uninspiring report. GBP and rates have continued to underperform their peers in a continuation from yesterday and with lingering concerns over the political landscape ahead of May’s general election, with long gilts up ~30 ticks compared to gains of just ~10 ticks in bunds. Volumes have been relatively light however and prelim month-end extensions fairly average.

Crude futures have pared most of the overnight weakness seen in the wake of weaker than expected Chinese PMI, driven by the slide in the USD index this morning, which also lifted precious metals to highs in early trade. Late yesterday Copper futures broke to fresh 11-week highs after a technical break above the 100 DMA, supported by a weaker USD and an output deficit forecast of 475K MT reported by the Copper Study Group however this strength was pared overnight following the Chinese data release.

In summary: European shares rise with the travel & leisure and media sectors outperforming and retail, utilities underperforming. European shares gain after earlier declines as Eurozone PMI beat ests., supported by expansion in Germany. Britain’s inflation rate dropped to zero in Feb., first ever stagnation in prices since data began almost 3 decades ago. The Italian and French markets are the best-performing larger bourses, Swiss the worst. The euro is stronger against the dollar. German 10yr bond yields fall; French yields decline. Commodities gain, with nickel, wheat  underperforming and WTI crude outperforming. * U.S. Markit U.S. manufacturing PMI, CPI, FHFA house price index, new home sales, Richmond Fed index due later.

Market Wrap

  • S&P 500 futures up 0.2% to 2099.1
  • Stoxx 600 up 0.2% to 402.2
  • US 10Yr yield little changed at 1.92%
  • German 10Yr yield down 1bps to 0.21%
  • MSCI Asia Pacific up 0.2% to 149
  • Gold spot up 0.1% to $1191.1/oz
    Eurostoxx 50 +0.4%, FTSE 100 +0.3%, CAC 40 +0.4%, DAX +0.3%, IBEX +0.3%, FTSEMIB +0.6%, SMI little changed
  • MSCI Asia Pacific up 0.2% to 149; Nikkei 225 down 0.2%, Hang Seng down 0.4%, Kospi up 0.2%, Shanghai Composite up 0.1%, ASX up 0.2%, Sensex down 0.1%
  • 8 out of 10 sectors rise with health care, utilities outperforming and consumer, financials underperforming
    Euro up 0.22% to $1.097
  • Dollar Index down 0.2% to 96.84
  • Italian 10Yr yield up 1bps to 1.3%
  • Spanish 10Yr yield up 1bps to 1.27%
  • French 10Yr yield down 1bps to 0.48%
  • S&P GSCI Index up 0.7% to 404.7
  • Brent Futures up 1.2% to $56.6/bbl, WTI Futures up 1.4% to $48.1/bbl
  • LME 3m Copper up 0.3% to $6136/MT
  • LME 3m Nickel down 1.1% to $14145/MT
  • Wheat futures down 0.9% to 529 USd/bu

Bulletin headline summary from RanSquawk and Bloomberg

  • The USD drives price action once again this morning as the index touches lows hit in the wake of last week's FOMC statement and EUR/USD tests 1.1000
  • Several Fed speakers hit the tape overnight including Fischer and Williams who said they expected a hike this year and the US economy can handle a strong USD
  • Looking ahead there is quite a bit of US data due for release with CPI, US manufacturing PMI, New Home Sales and API inventories after the US close.
  • Treasuries steady before week’s auctions begin with $26b 2Y notes; WI yield 0.605% vs. 0.603% last month.
  • Feb. consumer prices also due, est. +0.2%, ex-food and energy +0.1%.
  • Markit’s euro-area composite PMI rose to 54.1 in March from 53.3, higher than expected; composite gauges for Germany and France were both well above the 50-point mark
  • Merkel encouraged Greece’s Tsipras to follow the path set out by the nation’s creditors, saying his country belongs in Europe and she wants its economy to succeed.
  • Greece is now a “lose-lose game” and the chances of it leaving the euro area are now 50/50; country could go “down the drain,” billionaire investor George Soros said in a Bloomberg Television interview due to air  Tuesday
  • Britain’s inflation rate dropped to zero in February, the first ever stagnation in prices since the data series began almost three decades ago
  • HSBC/Markit’s China preliminary manufacturing PMI was at 49.2 in March, missing the median estimate of 50.5 in a Bloomberg survey and down from February’s 50.7
  • SF Fed President John Williams said a discussion should happen mid-year about tightening policy, even as he lowered his economic growth forecast
  • European banks will offload EU100b of unwanted loans this year to cut costs and restructure their balance sheets, according to a report by PricewaterhouseCoopers LLP
  • Saudi Arabia and its Gulf partners will take “necessary measures” to restore stability in Yemen if peace talks fail to resolve the growing conflict there, the Saudi foreign minister said
  • Sovereign 10Y yields lower. Asian stocks mixed, European stocks mostly higher, U.S. equity-index futures gain. Crude, gold and copper gain

US Event Calendar

  • 8:30am: CPI m/m, Feb., est. 0.2% (prior -0.7%)
    • CPI Ex Food and Energy m/m, Feb., est. 0.1% (prior 0.2%)
    • CPI y/y, Feb., est. -0.1% (prior -0.1%)
    • CPI Ex Food and Energy y/y, Feb., est. 1.7% (prior 1.6%)
    • CPI Index NSA, Feb., est. 234.728 (prior 233.707)
    • CPI Core Index SA, Feb., est. 240.122 (prior 239.871)
  • 9:00am: FHFA House Price Index m/m, Jan., est. 0.5% (prior     0.8%)
  • 9:45am: Markit US Manufacturing PMI, March preliminary, est. 54.6 (prior 55.1)
  • 10:00am: New Home Sales, Feb., est. 464k (prior 481k)
  • New Home Sales m/m, Feb., est. -3.5% (prior -0.2%)
  • 10:00am: Richmond Fed Mfg Index, March., est. 3 (prior 0) Supply
  • 11:30am: U.S. to sell $40b 4W bills
  • 1:00pm: U.S. to sell $26b 2Y notes

DB's Jim Reid completes the overnight recap

Its also flash PMI day and already both Japan (50.4 vs. 52.0 expected) and China (49.2 vs. 50.5 expected) have disappointed. The sub-50 reading for China in particular was a new 11-month low with new orders appearing to be the main drag (49.3 from 51.2 previously) highlighting weak domestic demand. Our colleagues in China note that the reading reinforces their view of both a property slowdown and a fiscal slide starting to hit the economy. They've reiterated that GDP will slow in Q1 to 6.8% yoy (well below consensus of 7.2%) and a policy easing cycle will start soon. Bourses are weaker on the back of the data. The Shanghai Comp (-0.71%) and Nikkei (-0.11%) are both softer while the Hang Seng (-0.39%) is following suit.

Back to markets yesterday, there were interesting comments out of the Fed’s Fischer who said that a rate rise will ‘likely be warranted before the end of the year’ and that ‘a smooth path upward in the federal funds rate will almost certainly not be realized’. Such a comment shows the desire to raise rates is still there from the Fed but they have seemingly moved from targeting June a few months ago to signaling starting normalisation now before year end. There is definitely some timing slippage from the Fed. There were similar comments out of the Cleveland Fed President Mester too, who commented that ‘it would be appropriate to raise interest rates sometime this year’ before clarifying that this keeps June open, but doesn’t mean that this is the most necessary time frame. Meanwhile, early this morning the San Francisco Fed President Williams was quoted on Bloomberg as saying that ‘I think that by mid-year it will be the time to have a discussion about starting to raise rates’ with the article noting that the language used dropped the ‘serious discussion’ language Williams had used in a speech earlier this month’.

Markets yesterday appeared to initially react in a similar fashion to the post-FOMC trend last week. The Dollar tumbled, equity markets rose, credit markets were firmer and US Treasuries tightened. With the exception of a late sell-off in equity markets, the moves were more or less consistent with the earlier price action. The Dollar, as measured by the broader DXY, softened 0.93% for its second consecutive daily decline and 5th in 6 sessions. Treasuries extended their recent rally with the yield on the 10y benchmark closing 1.8bps lower at 1.912%. Equities, however, closed in the red following a sell-off in the last 15 minutes of trading. The S&P 500 (-0.17%) and Dow (-0.06%) finished down after both had traded some 0.3%-0.4% higher intraday. The late weakness appeared to be fairly broad-based and came despite a second consecutive positive day for oil markets with both WTI (+1.89%) and Brent (+1.08%) higher. Although taking something of a backseat, data disappointed once again with both the February Chicago Fed national activity index (-0.11 vs. +0.10 expected) and existing home sales (+1.2% mom vs. +1.7% expected) coming in below market consensus.

Closer to home yesterday, markets closed softer in Europe with Greece, Draghi and Spanish elections in focus. Just recapping the price action first, the Stoxx 600 ended -0.69% to bring a run of three consecutive daily gains to an end. The DAX (-1.19%) and CAC (-0.65%) also closed weaker. With the weakness in the Dollar yesterday, the Euro closed 1.16% firmer yesterday at $1.095. Government bond markets saw the most significant moves yesterday. 10y Bund yields bounced off their recent record lows to close 4bps higher at 0.222%, while yields in Spain (+8.0bps), Italy (+9.1bps) and Portugal (+11.1bps) were considerably wider.

Some of the weakness in peripherals could well be as a result of the latest Spanish regional election in Andalusia. Spanish PM Rajoy saw his party suffer a significant loss of voters, with the People’s Party getting just 26.8% of the votes – it’s worst election result in 25 years in the region and down from 40.7% in the last vote in 2012. The socialist party maintained its hold on the region, securing 47 seats to the PP’s 33 seats. Meanwhile, the anti-austerity focused Podemos party secured 15 seats in its first test since Syriza secured victory in Greece. The party in fact secured victory in the city of Cadiz, exceeding expectations according to the UK’s Guardian. With political uncertainty rising, coupled with further support for the Podemos party ahead of a national election at the end of the year, developments in Spain will be well worth keeping an eye on.

In Berlin yesterday, the meeting between Germany’s Merkel and Greece’s Tsipras offered little in the way of fresh headlines with the head to head meeting appearing to be a tension easing exercise more than anything else. The tone coming out of the meeting was fairly conciliatory with Merkel emphasizing shortly after that she ‘sensed an appetite for cooperation’ according to Greek press Ekathimerini before going on to state her desire for Greece to grow and overcome its high unemployment. Tsipras offered a similar tone, stating that both camps are trying to find common ground to reach an agreement soon on reforms. Despite the generally better tone, until we see evidence of further progress on the reform front in the face of a deteriorating liquidity position, we still remain nervous over the outcome even if compromise is still the base case.

Wrapping up the news in Europe yesterday, comments from the ECB President Draghi attracted some headlines. In a statement to parliament in Brussels, Draghi pushed back on suggestions that the ECB’s QE programme may run into a shortage of bonds to buy with Draghi in particular reinforcing that market liquidity remains ample. The ECB President also adamantly responded to accusations that the ECB is blackmailing Greece, in particular making reference to the ECB’s significant exposure to Greek debt as evidence of commitment. The President also made a cautious statement towards a reinstatement of the collateral waiver for Greece, specifically saying that ‘several conditions need to be satisfied and they are not there yet but we are confident they will be if this process of policy dialogue is being reconstructed’ (Reuters). Finally, the FT last night ran with the story of Draghi hitting back at accusations that the ECB’s QE programme will lead to governments scrapping economic reforms. Instead, Draghi argued that QE would produce an ‘additional benefit’ for eurozone countries when ‘complemented by structural reforms’.

In terms of today’s calendar, it’s a busy day for data releases and we start in Europe with the release of the preliminary March manufacturing, services and composite PMI’s for the Euro-area as well as regionally in France and Germany. The aforementioned CPI print in the UK will of course be of much focus. The market is expecting a headline +0.3% mom print and +0.1% yoy (down from +0.3% previously) reading while at the core consensus is for a +1.3% yoy (from +1.4%) print. The RPI and PPI prints in the UK are also due this morning. The inflation reading will of course take up much of our attention this afternoon in the US too with the market headline expected at +0.2% mom and -0.1% yoy (unchanged) while the core is expected at +0.1% mom and +1.7% yoy (from +1.6%) . Elsewhere, manufacturing PMI, new homes sales and the Richmond Fed manufacturing index round off the releases.