Following yesterday’s early MNI rumor that a Chinese QE is being “considered” and which sent the Shanghai Composite surging 3% and led to an initial boost in US stock futures, overnight the PBOC scrambled to once again deny such speculation.
A few hours ago, PBoC chief economist Jun Ma said in an interview that media report on China’s QE is ungrounded. Paraphrased by UBS, Ma said that the central bank has enough tools to manage liquidity and base money supply with current tools at hand, and there was no need for the central bank to purchase local government bonds to supply base money. Ma noted that the central bank law specifically prohibits central bank to provide direct financing to the government. Forgive us if after the ECB roundly flouted a comparable law, we are somewhat skeptical that mere laws can stop central banks. Ma also said that at the moment the PBoC has not considered allowing LGFV loans to be used as collateral for central bank onlending.
Of course, going full “cold Turkey” on Chinese stimulus would be too much for the market to handle, so in a piece by the WSJ also released overnight, the author said the PBOC would pivot from outright QE to mere LTRO, which is also not new and was reported over a week ago here in “China Floats QE Trial Balloon, PBoC May Launch LTROs.”
In any event, for now at least, Asian stocks are not happy despite Apple’s latest blockbuster results, and neither is Europe, with the Stoxx 600 down 1%, and even the E-mini is hugging 2100 unable to levitate on any imminent central bank intervention, even though the UK’s 0.3% Q1 GDP coming in well below the 0.5% consensus, and the lowest growth rate since Q4 2012 suggests that it just may be time for the BOE to join global QE once again.
In more detail, Asian stocks trade mostly lower after tracking yesterday’s biotech-led Wall Street losses, as the S&P 500 and Nasdaq Composite retreated off record highs. Nikkei 225 (+0.4%) was the session’s outperformer lifted by upbeat corporate earnings. Hang Seng (-0.1%) and Shanghai Comp (-1.1%) pulled away from 7yr highs as participants paused for breath following their recent rallies. ASX 200 (-0.6%) fell amid profit taking after Jun’15 futures opened above 6,000.
European equities took the lead from the negative closes in Asia and the US in what has been a relatively uneventful session from a fundamental standpoint. However, stocks have been the main focus following the release of earnings from European large caps such as Total (+1.7%), BP (+1.1%) Daimler (+2.1%) with Commerzbank (-4.5%) amongst the worst performing stocks falling as low as 5% after their EUR 1.4bln capital increase. The energy sector is leading the gains buoyed by BP and Total posted positive earnings as sharp costs cutting measures continue to take hold.
From a Greek perspective, Greek asset classes remain unfazed by the latest developments whereby Greek PM Tsipras said Greece will pass a new deal with lenders through the Parliament and ruled out a snap-election if the government failed to get a suitable deal. Tsipras also added that it is not necessary to go through a referendum because a deal will be reached with lenders.
In terms of fixed income, Bunds and UST’s are relatively unchanged as the markets continues to remain quiet ahead of tomorrow’s FOMC meeting as market participants are expecting further clarity on whether the Fed will completely rule out a June rate hike. Elsewhere, the release of UK GDP (Q1 A) Q/Q 0.3% vs. Exp. 0.5% which posted its slowest Q/Q growth since Q4 of 2012 caused Gilts to outperform.
In FX, following the release of the weak UK GDP pressured GBP/USD and sent the pair lower to fall below the 1.5200 before eventually paring the move lower to hit 7 week highs. However, slowed growth in the UK could possibly hurt the incumbent PM David Cameron’s Conservative Party in the election. EUR/CHF has printed fresh monthly highs after breaking through highs of 1.0450 not seen since the 9th April. AUD has enjoyed a relief rally in todays session to advance against all of its peers and posted its longest winning streak this year, after RBA governor Stevens declined to comment on monetary policy before next week’s rate decision. As such, OIS are now pricing in a 51% chance of 25bps RBA rate cut vs. 56% seen prior to Stevens’ speech. With the exemption of the aforementioned currencies, FX markets have been tentative with the USD-index trading flat as investors wait on the side-lines eyeing major tier 1 releases in the week.
In summary: European shares fall with the health care and insurance sectors underperforming and oil & gas, utilities outperforming. Fed Seen Delaying Liftoff to Sept. to Push Down Unemployment. China Said to Consider PBOC Lending Tool to Help Local Debt. U.K. Economy Grows at Slowest Pace Since 2012. Daimler Profit Surges 41% as Sales Gains Beat Growth at Rivals. BP Profit Beats Estimates as Refining Offsets Oil’s Plunge. The Swedish and French markets are the worst-performing larger bourses, the Spanish the best. The euro is stronger against the dollar. German 10yr bond yields fall; French yields decline. Commodities decline, with nickel, natural gas underperforming and copper outperforming. U.S. S&P/Case-Shiller home price index, consumer confidence, Richmond Fed index due later.
Elsewhere, precious metals are also unmoved as spot gold resides just above the key psychological level of USD 1,200. In the energy complex, WTI and Brent crude futures have erased opening losses to trade relatively unchanged ahead of today’s API crude inventories data release.
Market Wrap:
- S&P 500 futures down 0.2% to 2100.9
- Stoxx 600 down 1% to 408.5
- US 10Yr yield little changed at 1.92%
- German 10Yr yield down 1bps to 0.15%
- MSCI Asia Pacific up 0.3% to 157
- Gold spot down 0.1% to $1201.1/oz
- Eurostoxx 50 -0.7%, FTSE 100 -0.8%, CAC 40 -1%, DAX -0.7%, IBEX -0.1%, FTSEMIB -0.3%, SMI -0.9%
- Asian stocks rise with the Sensex outperforming and the Shanghai Composite underperforming.
- MSCI Asia Pacific up 0.3% to 157; Nikkei 225 up 0.4%, Hang Seng up 0%, Kospi down 0.5%, Shanghai Composite down 1.1%, ASX down 0.6%, Sensex up 0.8%
- 7 out of 10 sectors rise with industrials, consumer outperforming and energy, tech underperforming
- Euro up 0.32% to $1.0926
- Dollar Index down 0.3% to 96.47
- Italian 10Yr yield up 1bps to 1.37%
- Spanish 10Yr yield up 1bps to 1.31%
- French 10Yr yield down 1bps to 0.41%
- S&P GSCI Index down 0.1% to 433.5
- Brent Futures down 0.2% to $64.7/bbl, WTI Futures down 0.3% to $56.8/bbl
- LME 3m Copper up 0.4% to $6090/MT
- LME 3m Nickel down 1.1% to $13400/MT
- Wheat futures down 0.3% to 471.8 USd/bu
Bulletin Headline Summary from Bloomberg and RanSquawk
- European equities take the lead from negative closes in Asia and the US, with the energy sector outperforming following positive earnings from Total and BP
- A slowdown in UK growth weighs on UK asset classes in what has been an uninspiring session as markets await tomorrow’s FOMC meeting
- Looking ahead sees the release of US Consumer Confidence, API Crude Inventories with large cap earnings from Pfizer, Merck, Bristol-Myers Squibb and Ford
- Treasuries steady before Fed begins two-day meeting, U.S. sells $35b 5Y notes. WI yield 1.35% vs 1.387% in March; 10Y remains within 1.800% and 2.01% range, narrowest over a 6-wk period since November.
- FOMC’s statement tomorrow likely to indicate weak 1Q eco data due to temporary factors, reflect reduced chances of June liftoff, based on published research and interviews
- PBOC is considering expanding a new lending tool in an effort to bolster demand for local-government bonds, as policy makers seek to develop a municipal debt market and avoid a credit crunch
- The U.K. grew 0.3% in 1Q, less than forecast and weakest since 4Q 2012; economists had forecast growth of 0.5 percent, according to a Bloomberg News survey
- Greek govt is EU400m short of the amount needed for payment of pensions and salaries this month, Kathimerini newspaper reports, without citing anyone
- ECB Governing Council member Christian Noyer says that Greece’s Yanis Varoufakis may have been an irritant in negotiations between Greece and its creditors; says ECB help to Greek banks “can’t continue indefinitely”
- Germany plans to subordinate certain categories of senior bank debt, including sr unsecured bonds, Schuldschein loans and registered bonds, to make it easier to impose losses on creditors of failing banks, according to a draft law
- Japan’s retail sales fell in March the most since 1998, cutting against Kuroda’s view that cheaper energy will give a boost to the world’s third-biggest economy
- Riots erupted in Baltimore after the funeral of a black man who died of injuries suffered while he was in police custody, prompting officials to declare a state of emergency, impose a curfew and close schools
- Sovereign bond yields mixed. Asian, European stocks fall, U.S. equity-index futures decline. Crude oil lower, gold little changed, copper higher
US Event Calendar
- FOMC opens two-day policy meeting
- 9:00am: S&P/CS 20 City m/m SA, Feb., est. 0.7% (prior 0.87%)
- S&P/CS Composite-20 y/y, Feb., est. 4.70% (prior 4.56%)
- S&P/CaseShiller 20-City Index NSA, Feb., est. 173.13 (prior 172.94)
- S&P/Case-Shiller US HPI m/m, Feb. (prior 0.57%)
- S&P/Case-Shiller US HPI y/y, Feb. (prior 4.47%)
- S&P/Case-Shiller US HPI NSA, Feb. (prior 166.66)
- 10:00am: Consumer Confidence Index, April, est. 102.2 (prior 101.3)
- 10:00am: Richmond Fed Mfg Index, April, est. -2 (prior -8)
- Employment Cost Index benchmark revisions
- 1:00pm: U.S. to sell $35b 5Y notes
DB’s Jim Reid concludes the overnight recap
the strong equity rally in China/HK yesterday is taking a slight breather overnight. Bourses in Shanghai and HK are still trading positively but gains are certainly more measured than what we’ve seen in recent weeks. However as we go to print there seems to be some follow through on the Chinese QE story that we flagged yesterday. Bloomberg news is reporting that the PBOC is considering an expansion of its lending facility to encourage banks to “buy local government bonds, improve dilapidated housing, and fund govt’s “One Belt, One Road” project”. The article said that PBOC may expand the use beyond last year’s CNY1trillion and also expand the recipient banks beyond China Development Bank. Banks may also use more assets as collateral for the lending facility (including local government bonds). Sounds/smells like a Chinese style LTRO to us.
Commenting yesterday on the QE hints, our China economist Zhiwei Zhang noted that the government has been silence on this. If the story was true it would reinforce his view that China has entered a significant policy easing cycle. The story also shows the willingness of the central bank to co-ordinate with the Ministry of Finance to jointly resolve the local government debt issue in China. In reality SOE reform hopes were also one of the drivers of yesterday’s stock rally on reports that the government may consider merging Petrochina and Sinopec into one giant integrated oil company. There were also reports citing that China is considering a wave of SOE restructuring which would reduce the number of state owned companies to 40 (from 112). The story has been denied by the Chinese authorities and Petrochina itself overnight.
Away from China markets are a little mixed in Asia with bourses in Australia and Korea a little weaker but Japan is trading a little better. Asian credit investors are focusing on upcoming supply but new deals have generally done well in secondary. The Dollar continues to weaken with the DXY index now down for its 5th consecutive session. Commodities are a little weaker too with Brent, WTI and Copper down -1.2%, -1.3% and -0.7% respectively.
The Asian session is holding relatively well considering the lackluster performance during the US trading session yesterday. The S&P 500 (-0.41%) closed off the highs to post its first loss in four days. The data flow was less than encouraging with both the flash Markit April Services PMI (57.8 v 58.8 expected) and Dallas Fed Manufacturing Index (-16 v -12 expected) printing below consensus. Corporate earnings offered some relief yesterday and Apple’s better-than-expected results drove its shares a bit higher in after hours trading. Indeed 7 out of the 10 S&P 500 firms that reported yesterday came ahead of EPS consensus although only half of those 10 managed to beat sales estimates.
Looking back to Europe yesterday, to use a very overused expression it was a rollercoaster day for markets with weakness in the morning being more than reversed by the close. In equities the Stoxx 600 ended the day almost +1% higher after being as much as -0.7% down in the morning. The CAC and IBEX 35 closed the day up +1.2%, whilst the FTSE MIB closed up +1.6% and the DAX +1.9%. In credit iTraxx Main and Crossover ended the day tighter by almost -3bps and -12bps respectively.
This swing and the eventual solid gains on the day seemed to be driven by headlines out of Greece with the main news being the apparent move by the Greek PM Tsipras to partially side-line the Greek Finance Minister Varoufakis in talks with the nation’s creditors, moving the day-to-day negotiation efforts to Deputy Foreign Minister Euclid Tsakalotos (Bloomberg News). Mr. Tsakalotos is said to be an Oxford educated economist whose soft-spoken style contrasts sharply with that of Mr. Varoufakis (NYT). This was taken as a conciliatory move by the Greek government given how badly Varoufakis’s relationship with the nation’s creditors appears to have become. The Athex closed the day up +4.4% and Greek 10Y yields fell an entire percentage point to 11%. DB’s George Saravelos wrote yesterday that it remains to be seen whether these developments will actually translate into any meaningful progress but the market certainly saw it as a mini breakthrough. Outside of Greece it was a relatively quiet day for European macro news.
Looking to the day ahead in Europe the big news looks set to be UK Q1 GDP, with consensus expecting a read of +0.5% QoQ (vs +0.6% previously) and +2.6% YoY. Over in the US we have February S&P/CS house price reads and April consumer confidence. In terms of some earnings to watch we have 18 companies in the Stoxx 600 reporting in Europe including Daimler, BP, TOTAL, MAN and Santander. Over in the US 40 S&P500 companies are reporting including the likes of Pfizer and Ford
