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Futures Slide As Dollar, Rates Jump Ahead Of "Monster" Treasury Issuance

After a week in which stock-trading abruptly algos decided that rising yields are irrelevant at worst, and at best positive for equities, the correlation has again flipped overnight sending Asian shares lower and European share erasing earlier gains as bonds fell around the globe, with the 2Y Treasury yield rising 3bps to 2.23% - highest since September 2008 - and the 10Y briefly as high as 2.93%...

... ahead of this week's "monster issuance" of $258 billion  in TSY bills and notes...

... which in turn has sent the recently beaten down dollar higher for the third day in a row...

... and pushed S&P futures sharply lower for the second consecutive day, as the VIX is above over 21 as of 6am ET.

Europe’s main bourses saw a steady start as lower domestic currencies helped their cause, although early gains were quickly faded amid declines in auto and banking, but weakness across Asia where Tokyo and South Korea saw drops more than 1%, meant MSCI’s 47-country world share index was 0.2 percent in the red.

European equities trimmed initial gains (Eurostoxx 50 flat) to trade with little in the way of firm direction ahead of the US return to market. The FSTE 100 lagged peers (-0.4%) after disappointing earnings from index heavyweights HSBC (-4%) and BHP Billiton (-4%), dampening sentiment for UK stocks and the former leading to underperformance in the financial sector. Other individual movers include Hikma Pharmaceuticals (+9%) after appointing their new CEO, Fidessa (+21.4%) are also seen higher after reports that Swiss-listed Temenos (-6.8%) are to make an offer for the Co., while Intercontinental Hotels (-3.9%) have faced selling pressure this morning following a lacklustre earnings update.

MSCI Asia Pacific index declines for first time in seven days. The Hang Seng index slipped after HSBC profits missed; H-shares erase most losses after falling as much as 1.9%. n. In Australia, the ASX 200 came under pressure from material and financial names, with many of the large banks reversing the prior days gains. Over in Japan, the Nikkei (-1.0%) had tripped through 22,000 amid softness in tech names. The Hang Seng (-0.8%) reopened for the first time since last week, however initial gains had been short-lived.

But all attention today will be on the bond market, where as Bloomberg notes, debt investors are trading with caution as Treasury markets reopened after the Presidents’ Day break as the VIX jumped to its highest level in five sessions. As reported yesterday, Treasuries are under pressure ahead of what Bloomberg has dubbed "monster debt supply" in which the U.S. gets set to sale a record amount of debt with three days of auctions today totaling $258 billion. And while speculators are turning bearish - rapidly covering net short bets across the curve but mostly in the 2Y...

... money managers are looking at the highest U.S. yields in years as a buying opportunity in a world where shorter-term Japanese and German notes still carry negative yields.

“I just advise caution,” said Principal Global Investors’ chief global economist Bob Baur said about stocks as Wall Street futures also pointed lower. "I‘m not sure whether this (early February sell-off) was the dip to buy, there will probably be a relapse and then another relapse, before maybe around mid-summer stocks make another run up.

European bond yields pushed up too, with traders also working through the options of who could succeed Mario Draghi as European Central Bank chief next year after Spain’s economy minister was nominated for the bank’s number two job.

In other news, BOJ governor Haruhiko Kuroda didn’t discuss monetary policy during an appearance in parliament today. Speculation has been swirling about the possibility the BOJ is scaling back its stimulus since the central bank reduced its purchases of government bonds in January.

The UK is said to have a secret plan to withhold Brexit payments if the EU refuses to provide the UK with a desirable trade deal. Elsewhere, according to a letter seen last week, Netherlands government has linked its decision to activate hard Brexit plan amid a lack of clarity from the UK.

Echoing China, the German Economy Minister says the EU will respond appropriately if the US puts a tariff on European steel imports.

Speaking of Germany, it reported mixed February ZEw numbers: German ZEW Economic Sentiment (Feb) 17.8 vs. Exp. 16.5 (Prev. 20.4); German ZEW Current Conditions (Feb) 92.3 vs. Exp. 93.9 (Prev. 95.2)

South Africa’s rand and Turkey’s lira both gave back more of their recent gains, while growing concerns about the previously reported alleged fraud at India’s second-largest state-run bank sent the rupee skidding to a near three-month low: "Punjab National Bank will need to provide for at least a substantial portion of the exposure. As a result, the bank’s profitability will likely come under pressure,” rating agency Moody’s said as it put it on a downgrade warning.

In commodity markets, Oil prices were mixed, with reduced flows from Canada pushing up U.S. crude while Brent sagged $65.45 per barrel on the back of weaker Asian stocks and the dollar’s bounce. Spot gold slipped 0.4 percent to 1,341.06 an ounce, also corseted by the dollar’s bounce, while industrial metals including copper drifted lower for a second day in a thinner-than-usual trading due to new year holidays in China.

Bitcoin broke above $11,500, almost double its intraday low from just two weeks ago.

Bulletin Headline Summary from RanSquawk

  • European equities have trimmed initial gains (Eurostoxx 50 flat) to trade with little in the way of firm direction ahead of the US return to market
  • EU Parliament is to call for Britain to have privileged single market access after Brexit, according to Business
  • Insider
  • Looking ahead, highlights include US supply, WalMart earnings

Market Snapshot

  • S&P 500 futures down 0.6% to 2,719.50
  • STOXX Europe 600 up 0.1% to 378.63
  • MSCI Asia Pacific down 0.9% to 176.50
  • MSCI Asia Pacific ex Japan down 0.5% to 575.76
  • Nikkei down 1% to 21,925.10
  • Topix down 0.7% to 1,762.45
  • Hang Seng Index down 0.8% to 30,873.63
  • Shanghai Composite up 0.5% to 3,199.16
  • Sensex down 0.09% to 33,745.75
  • Australia S&P/ASX 200 down 0.01% to 5,940.85
  • Kospi down 1.1% to 2,415.12
  • German 10Y yield rose 2.0 bps to 0.755%
  • Euro down 0.4% to $1.2355
  • Brent Futures down 0.6% to $65.28/bbl
  • Italian 10Y yield rose 5.6 bps to 1.773%
  • Spanish 10Y yield fell 0.3 bps to 1.508%
  • Brent Futures down 0.6% to $65.28/bbl
  • Gold spot down 0.7% to $1,337.27
  • U.S. Dollar Index up 0.6% to 89.60

Top Overnight News

  • Latvia will seek to prevent ECB Governing Council member Ilmars Rimsevics from returning to his post after he was caught up in a bribery probe that’s rocked the Baltic nation, the country’s prime minister said in an interview
  • Treasuries are about to reach a turning point, with the trend toward a flatter yield curve poised to end in the next few months, says Akira Takei, a fund manager at Asset Management One
  • Chancellor Angela Merkel sent a strong signal in the debate over her preferred successor as German leader by appointing close ally Annegret Kramp-Karrenbauer as general secretary of her Christian Democratic Union party
  • Prime Minister Theresa May’s team is eyeing up a contingency plan to hold back billions of pounds in Brexit payments, if the European Union refuses to give the U.K. the trade deal it wants
  • Brexit Secretary David Davis will reassure the European Union that the U.K. won’t try to undercut the bloc by tearing up regulations after the split, making the case for mutual trust between regulators on each side
  • Spain’s Economy Minister Luis de Guindos won the backing of euro-area finance ministers late Monday to replace ECB Vice President Vitor Constancio; some economists reckon he may side with the more optimistic governors on the council, who have long been pushing for an end to quantitative easing, while at the same time being mostly consensus-oriented
  • Australia’s central bank reiterated that inflation is expected to “only gradually” accelerate as the economy strengthens and wage pressures increase, in minutes of this month’s policy meeting

Asian equity markets are somewhat fragile, with major Asian bourses off to a weaker start. US markets were closed for President’s day and as such, Asian participants took the cue from European equities which slipped in yesterday’s session. In Australia, the ASX 200 (flat) has come under pressure from material and financial names, with many of the large banks reversing the prior days gains. Over in Japan, the Nikkei (-1.0%) had tripped through 22,000 amid softness in tech names. The Hang Seng (-0.8%) reopened for the first time since last week, however initial gains had been short-lived, with the index conforming to the sombre tone. JGBs are flat in thin-trade, March futures contract down 2 ticks and hovering near yesterday’s levels. USTs off by 6+ ticks with yields continuing to pick up, 2yr yields now at the highest since Sep’08 after hitting 2.22%, while the US curve is also flattening this morning. The RBA meeting minutes failed to provide any fireworks with the central bank sticking with its neutral tone. As such, AUD had been largely unmoved post the release of the minutes and instead focus will fall on the wage price index due out tomorrow. RBA February minutes states that low rates are helping reduce unemployment and lift inflation, additionally rising AUD would impede pickup in economic growth and inflation, however AUD TWI is still within narrow range of past couple of years.

Top Asian News

  • Espenilla Says Philippine Rate Hike on Table But Data Dependent
  • India Is Said to Tighten Approvals for Offshore Borrowing
  • Bitcoin Rises as South Korea Talks ‘Active’ Support for Trading
  • BHP Falls as Much as 3.8% in London After Adj Profit Misses Ests
  • Toyota Readies Cheaper Electric Motor by Halving Rare Earth Use

European equities have trimmed initial gains (Eurostoxx 50 flat) to trade with little in the way of firm direction ahead of the US return to market. The FSTE 100 modestly lags its peers (-0.4%) after disappointing earnings from index heavyweights HSBC (-4%) and BHP Billiton (-4%), dampening sentiment for UK stocks and the former leading to underperformance in the financial sector. Other individual movers include Hikma Pharmaceuticals (+9%) after appointing their new CEO, Fidessa (+21.4%) are also seen higher after reports that Swiss-listed Temenos (-6.8%) are to make an offer for the Co., while Intercontinental Hotels (-3.9%) have faced selling pressure this morning following a lacklustre earnings update.

Top European News

  • Gulliver Ends HSBC Tenure With Rare Profit Miss on Margins
  • U.K. Has Plan to Halt Brexit Cash If EU Backslides on Trade Deal
  • Morgan Stanley Says Stock Slide Was Just Appetizer for Real Deal
  • Oil Holds Momentum That’s Driven by OPEC’s Promise to Re- Balance
  • A Diversified Portfolio May Not Help Investors Much This Year

In FX, the DXY has now rebounded above 89.500, and on broad-based gains vs G10 rivals, albeit mainly inspired by another round of short covering. A major French bank notes that the market remains very short of Dollars (in line with latest weekly CFTC spec positioning data) and modestly long Jpy and moves in the headline pairing off last week’s circa 105.55 low support the rebalancing theory as spot trades back over 107.00. 107.32 offers eyed next, and as a recap this level now forms resistance rather than support on the way down as the 2017 low. Similar price moves elsewhere, as Eur/Usd recoils further from recent peaks and briefly testing bids at 1.2350 with small stops just below, but not challenging key Fib support at 1.2319. Cable briefly reclaimed the 1.4000 handle after reports in Business Insider suggested that the EU Parliament is to call for Britain to have privileged single market access after Brexit. Usd/Chf now inching closer to 0.9350 and Usd/Cad just shy of 1.2600 amidst the ongoing Greenback recovery, while Aud/Usd is retesting 0.7900 on the downside with little direction gleaned from RBA minutes overnight, but key data to come
tomorrow (wage growth). Nzd/Usd straddling 0.7350, with strong chart support around 0.7338.

In commodities, WTI and Brent crude futures are seen higher albeit off best levels as the firmer USD caps gains; WTI holds above the USD 62.00bbl level (note the weekly API inventories will be released tomorrow, not today due to   yesterday’s US market holiday). In terms of energy news flow, the Joint OPEC/non-OPEC Technical Committee concluded that the oil glut is dissipating at a faster pace than anticipated, according to sources. Additionally, UAE energy minister claims OPEC and allies are to continue oil cooperation beyond 2018 and notes UAE, Saudi Arabia and Russia all support an extension cut beyond 2018. In metals markets, spot gold trades lower alongside the aforementioned firmer USD while copper prices have seen little in the way of firm direction as Chinese participants remain away from market. UAE Energy Minister says the UAE is expected to over-deliver on production cuts in Q1 due to maintenance commitment with OPEC-led pact.

Global Event Calendar

  • Mexico Citibanamex Survey of Economists
  • 8:30am: Canada Wholesale Trade Sales MoM, Dec., est. 0.4%, prior 0.7%
  • 10am: Mexico International Reserves Weekly, Feb. 16, no est., prior 173b

Bond Auctions:

  • 11:30am: U.S. to Sell USD51 Bln 3-Month Bills
  • 11:30am: U.S. to Sell USD45 Bln 6-Month Bills
  • 1pm: U.S. to Sell USD55 Bln 4-Week Bills
  • 1pm: U.S. to Sell USD28 Bln 2-Year Notes

DB's Jim Reid concludes the overnight wrap

With Chinese New Year holidays and President’s Day in the US, yesterday was always going to be quiet and we weren’t disappointed on this. It was a far cry from two weeks ago last night when we saw the largest single day spike in the VIX on record and a 1000 point move on the DOW in c20 minutes towards the end of the session. In reality the market has regained its poise very impressively since. For the markets that were open yesterday, it was generally a down day  though. The Stoxx 600 fell for the first time in four days (-0.63%), but trading volume was thin and at roughly half the 30 day average. Within the Stoxx, losses were led by the health care, consumer and real estate sector, with Reckitt  Benckiser down 7.5% after warning pricing pressures would continue to hit margins. Across the region, the DAX (-0.53%) and FTSE (-0.64%) also fell modestly while Italy’s FTSE MIB was the relative laggard at -1.0%. The Vstoxx rose for the first time in six days, up 7.7% to 19.13.

Government bonds weakened with core 10y bond yields up 2-4bp (Bunds +2.8bp; Gilts +2bp), in part reversing Friday’s gains in the absence of material macro data. Key peripherals yields were also up 2-5bp, while Greek bonds outperformed with its 10y yields down 1.9bp after Fitch upgraded the country’s long term issuer rating from B- to B with a positive outlook retained. Post the change, Fitch’s rating is now in line with S&P’s. In FX, the US dollar index was marginally higher (+0.13%) while the Euro was broadly flat and Sterling fell 0.19%. In commodities, WTI oil was up 1.33% to $62.50/bbl while precious metals were little changed (Gold -0.04%; Silver +0.18%).

This morning in Asia, markets are broadly lower with the Nikkei down for the first time in four days (-1.06%), while the Kospi (-1.27%) and Hang Seng (-0.37%) are also lower, as the latter pared back earlier gains as trading resumed post the New Year holidays. The UST 10y yield is up 2bp and S&P index futures are down c0.3% this morning.

Back in Europe, finance ministers have nominated the Spanish Economy Minister Luis de Guindos to be the next Vice President of the ECB to replace Mr Constancio. The decision puts Spain back on the ECB’s executive board after a six year absence. Mr de Guindos will resign from his existing post within days and said he is “pragmatic” rather than a dove / hawk when it comes to monetary policy and will always defend the ECB’s independence. Looking ahead, he will face a hearing at the EU Parliament and then EU leaders will ratify his appointment at their summit on March 22. Elsewhere, Germany’s acting Finance Minister Peter Altmaier said Mr de Guindos would be an “excellent choice” for the role.

Staying with the ECB, the latest QE purchases data was released yesterday. It was yet another very strong week for CSPP relative to PSPP which now leaves little doubt about the ECB's intentions to keep the former elevated relative to the latter, given that we now have 6 full weeks of data since they halved the net flow of QE. The CSPP/PSPP ratio was 29.4% (27.3% over last 4 weeks). As a reminder, before Apr 2017 when QE was still €80bn/m the ratio was 11.5%.

Between Apr-Dec 2017 (QE €60bn/m) the ratio edged up to 12.7% but since Jan 2018 (QE €30bn/m) the ratio is now 25.5%. Indeed the strength of corporate vs. government purchases as proxied by the CSPP/PSPP ratio has so far surpassed our expectations of "roughly 20%".

Staying in Europe, an interesting story yesterday as SPD members now start voting as to whether to enter a coalition with Mrs Merkel, was the one that suggested that the far right AfD party has overtaken the SPD in the polls for the first time. The Bild/INSA poll put them at 16% and 15.5% respectively against 12.6% and 20.5% at the election back in September. The fear from the SPD was always that a renewed collation agreement would lead to them seeing their popularity drop further but with stalemate elsewhere they were left with limited choice but to negotiate in the end. Are the electorate punishing them for their decision to enter talks or the fact that it took so long to do so? Either way, in our view the fact that far right in Germany are now second in the polls is fairly remarkable really.

Continuing with politics, ahead of the 4th March national election in Italy, DB’s Clemente De lucia noted that the risk of a hung parliament remains high, but it is a close call as the centre-right coalition is closing the gap to get an outright majority. If the elections prove to be inconclusive, Clemente expect the parties and institutions to work hard to form a grand coalition. Whatever the result of the elections, the fiscal stance will be in the spotlight after the vote. All parties are pledging significant expansionary policies. As things stands, Italy does not comply with EU fiscal rules and without some adjustments, Rome could be on a collision course with Brussels. With the gap between Rome and Brussels not significantly large, we expect a compromise to be reached. Refer to the note for more details.

Now turning to some of the Brexit headlines. The BOE governor Carney noted the transitional deal to be reached before the end of March “obviously won’t be a hard, legally binding agreement, but….something that has legal text associated with it, which will be part of the separation agreement, (then) that should be good enough”. Elsewhere, three unnamed senior British officials have told Bloomberg that the UK have a fall back option of withholding the £40bn divorce Brexit payments to ensure the EU agrees to the trade deal it wants. The former leader of PM May’s conservative party Iain Duncan Smith said “either the EU gives us a trade deal or they won’t get any money at all”. Finally, DB’s Oliver Harvey has assessed the suitability of a CETA (comprehensive economic and trade agreement) type deal between the UK and the EU and the implications for growth and markets. Overall, the team believes there are no workable alternatives for the UK to maintain close to present levels of trade with the EU27 in the current time frame outside of the EEA and a separate customs agreement. They expect this to be the ultimate destination of Brexit, but not before a political crisis. Refer to their note for more details.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. The February Rightmove index on asking prices for UK homes was above the prior month’s reading at 0.8% mom (vs. 0.7% previous) and 1.5% yoy (vs 1.1% previous). The Euro area’s current account surplus in December was below last month’s reading at €29.9bln (vs. €32.5bln previous) but the fullyear surplus rose to a new high of €392bn. In Asia, Japan’s Reuters' Tankan manufacturers' index fell 6pts to +29 in February (vs. the prior reading at an 11- year high), while the non-manufacturers index was steady at a solid level of +33.

Looking at the day ahead, the January PPI and the February ZEW survey are due in Germany. The February CBI selling prices data in the UK and the February consumer confidence print for the Euro area are also due in the afternoon. In terms of politics, the Social Democrats party in Germany will begin a two-week period for members to vote on the  proposed coalition pact.