With the bond market closed today due to Veteran's Day and the correlation and momentum ignition algos about to go berserk without any parental supervision, it was only a matter of time before some "stray" headline sent first the carry pair of choice, i.e., the USDJPY, and subsequently its derivative, the Emini, into the stratosphere. And sure enough, just before 3am Eastern, it was once again Reuters' turn to leak, only this time not about the ECB but Japan, as usual citing an unnamed "government official close to Abe's office", that Prime Minister Shinzo Abe was likely to delay a planned sales tax increase.
JAPAN MORE LIKELY TO DELAY SALES TAX INCREASE, REUTERS REPORTS
From the source:
Japanese Prime Minister Shinzo Abe is likely to delay a planned increase in the nation's sales tax, judging that the economic recovery remains too fragile to weather a further blow, a government official close to Abe's office said on Tuesday.
The comment comes as momentum appears to be building for Abe to delay the painful measure and call a snap election, with major parties scrambling to prepare for a possible campaign.
"There's a high probability that the consumption-tax hike will be delayed," the person told Reuters. "It looks like the government will begin full-fledged consideration of this."
Which of course is a repeat of what Reuters said 2 days ago but since it came on the weekend, the momentum ignition algos didn't notice. The result was an instant surge in the USDJPY, which shortly thereafter touched on 116.00 the highest level in 7 years, and is up now 200 pips since yesterday as the obliteration of Japan's economy proceeds, in turn pushing European stocks, and shortly, the S&P, higher.
It also explains why the other key overnight headline was the following:
JAPAN RULING PARTY LAWMAKERS SAID PREPARING FOR SNAP ELECTION
The reason for that is that as we reported yesterday, the Japanese population is becoming increasingly dissatisfied with living under a central-planning money-printing madman who is willing to destroy the entire country just so a few billionaires can become trillionaires (or quadrillionaires in Yen terms). This was further substantiated by the latest consumer confidence data out of Japan, which dropped to 38.9 in Oct., down 1 point, with the sub-indices for overall livelihood, employment, income growth and willingness to buy durable goods all falling. Arguably the reason why a snap election is positive for risk is that Abe would be re-elected in a landslide. That is possible, but only if Diebold is again put in charge of all the voting machine and a whole lot of hanging chads result Abe's "reelection."
Meanwhile, European equities traded in the green from the off-set with the broader macro moves for session being dictated by events in Japan. As RanSquawk repeats, overnight, the Nikkei 225 surged higher following reports that PM Abe could delay the beginning of the sales tax hike by 18 months, with the leader potentially set to cash in on his increased popularity (given that 2/3 of the Japanese public view a sales-tax hike in an unfavourable manner) by calling a snap-election. Such a delay would be positive for Japanese equities as it would not restrain consumption as some had feared and thus benefiting spending within the economy. The move saw a second wave ahead of the European open following further source comments that indicated that such a delay is likely, with this rhetoric closely followed up by comments from LDP lawmakers confirming the snap election preparations are in place, which subsequently saw the Nikkei 225 CME future rise higher to trade with gains of 1.9%. Since then PM Abe has been on the wires saying that he has made no such plans to call a snap election, although this announcement brought little in the way of a market reaction.
Elsewhere, following the resurgence in the USD-index following these moves, USD exerted further pressure on the commodities complex, with WTI breaking below yesterday's lows and squeezing the precious metals complex, which has subsequently left materials and energy names, the sole underperformers in Europe. Furthermore on a stock specific basis for equities, telecom names are the notable outperforming sector, following Vodafone’s (+5.4%) earnings report which has seen their shares climb to the top of the European leaderboard this morning.
As a reminder today is US Veteran's Day which means there will be no pit trade in Chicago, however NYSE and NYMEX will both be open for trade as usual. And since volume will be abysmal, and since the USDJPY has given the green light, we expect the S&P to hit Goldman's year end target of 2050 with virtually no resistance.
More specifically open outcry for CME FX and Interest Rate products is closed, however CME Globex electronic trade for FX, Interest Rate, Commodities and Metals will be open as per normal
To summarize:
European shares rise with the telco and real estate sectors outperforming and basic resources, oil & gas underperforming. Japanese yen weakens to 7-year low on reports Abe likely to delay sales tax increase. Companies including Vodafone, CRH, Hochtief, AP Moeller-Maersk released results. The Spanish and Italian markets are the best-performing larger bourses, Swiss the worst. The euro is weaker against the dollar. Japanese 10yr bond yields rise; U.K. yields increase.
Commodities decline, with natural gas, copper underperforming and corn outperforming. U.S. small business optimism due later.
Market Wrap:
S&P 500 futures up 0.1% to 2036.4 Stoxx 600 up 0.4% to 339 US 10Yr yield little changed at 2.36% German 10Yr yield up 1bps to 0.85% MSCI Asia Pacific down 0.1% to 140.7 Gold spot little changed at $1151.4/oz
Bulletin headline summary from RanSquawk and Bloomberg
Speculation over a potential sales tax hike delay and calls for a snap election in Japan have boosted European equities from the get-go. This has subsequently seen USD/JPY touch its highest level since 2007, as such a move regarding the sale tax could be seen as a form of fiscal stimulus. Looking ahead, today’s session sees a lack of tier 1 releases, with volumes expected to be thin Stateside given the Veterans Day holiday.
FX
Following the aforementioned developments in Japan, JPY has been placed under broad-based weakness, with USD/JPY breaking above 115.00 and touching 116.00 for the first time since 2007 as should PM Abe delay the sales tax hike then this could be perceived as a form of fiscal stimulus for the Japanese economy. Furthermore, RANsquawk sources also reported macro fund buying in the pair to hedge Nikkei 225 option positions, which were reported at the 17,250 level. Elsewhere in FX markets things remain relatively subdued with a lack of tier 1 data for the session and volumes due to be light given the Veterans Day Holiday in the US.
COMMODITIES
The commodities complex has once again been largely swayed by movements in the USD-index with WTI prices slipping below USD 77.00 and yesterday’s lows in early trade, while precious metals prices also felt the squeeze of the resurgence in the greenback. However, since then WTI prices have managed to climb back above USD 77.00 with a volumes thin and a lack of fundamental newsflow to dictate the state of play. Nonetheless, it is worth noting that Libya's Hariga port is still closed with talks with protesters ongoing, according to an oil official. Elsewhere, NatGas futures are continuing to pullback from last week’s hefty gains, although fears continue to mount over the possibility of a particularly could inter in the US which could trigger a surge higher in prices. Finally, Copper has consolidated a break below USD 3.00 in combination with strength in the USD and as industrials in Asia underperformed.
DB's Jim Reid concludes the overnight recap
Over the last couple of months there has been no shortage of things to write about on a daily basis but it seems we've hit a little lull. The post payroll week is always a bit light on data, which is compounded by the fact that we're now past the ECB meeting. Today is Veteran's Day holiday in the US so we're likely to be on the quiet side even though equity markets are open. The next major events are likely to be the European inflation and Q3 GDP numbers on Thursday and Friday this week.
I'm hoping for a little run of quiet markets as yesterday we started work on our 2015 outlook after a few weeks of reading and preparation. Every year at this time I always think the next year's outlook is the hardest ever. This time feels no different. In our 2014 outlook - "The Bubble-Taper Tightrope" we basically felt that if central banks pulled back too quickly we'd have big problems for markets and if they kept the taps fully on we'd likely end up with a bubble in many asset classes. We thought overall they would err on the side of easy policy. In reality central banks have indeed controlled this year but we've ended up muddling through rather than seeing a strong trend either way emerge. By the end of H1 we were starting to see a bias towards bubbles but the end of QE has helped stop this and the universally strong positive trend that we saw when QE3 was in full flow has been waning. However there are still doubts as to whether the Fed can raise rates in 2015 and markets have responded positively to this. The ECB has disappointed but is now starting to expand its balance sheet again after a two and a half year hiatus and the BoJ has recently stepped on the accelerator again. So in spite of the Fed fully tapering, its been a positive year for central bank liquidity overall. It would likely have been a bad year without it though. Its hard to escape from a similar conclusion for 2015 but let's see what our work leads us to write over the next 3-4 weeks. Any thoughts or moments of inspirations vis-a-vis 2015 would be gratefully received. Feel free to drop us an email.
In the absence of market moving news-flow/data, yesterday’s price action was relatively subdued. The S&P 500 (+0.3%) was pretty much unchanged at 2,038 although this still marks the fourth consecutive day of new highs for the index. Both the S&P and Dow have rallied over 7% in the last three weeks, marking it as the best three week performance for both indices since October 2011. Away from equities however, US Treasuries were notably weaker although that came on the back of a strong performance last Friday. The curve bear-steepened led by underperformance in longer-dated bonds. A soft 3yr auction and what was perceived to be a hawkish research paper from the economists of San Francisco Fed were both cited as possible reasons for the UST weakness.
In terms of the 3yr auction yesterday, the bid-to-cover ratio of the new notes was recorded at 3.18 which compares with an average of 3.42 over the past ten auctions. The now off-the-run 3yr yields rose +4bp to 0.97% whilst 10yr rose 6bps to 2.36% to give back nearly all of last Friday’s gains. In reality the 10yr yield has been bound inside the 2.20-2.39% range since we normalised from the ‘flash-rally’ in mid-October. We have more Treasury auctions this week with a 10y note scheduled for Wednesday and 30y on Thursday so it will be interesting to see how these go. As for the San Francisco Fed paper, economists noted that both monetary and fiscal policy projections have been based on the view that declines in the long-run potential growth rate of the economy will in turn push down interest rates. In contrast, an examination of private sector professional forecasts and historical data provides little evidence of such a linkage which suggests a greater risk, that future interest rates may be higher than expected. We're not convinced but time will tell.
Before we look at markets elsewhere, there was further Fedspeak overnight. Rosengren was quoted as having said that the Fed should ‘fight low inflation as vigorously as it would a too rapid-run up in prices or else risk the same sort of prolonged slow growth plaguing Japan and Europe. He also repeated his call for the Fed to remain patient in raising rates until there is more certainty, although he mentioned that there are a number of forces conspiring against that.
Moving on to markets it was a notably weaker session for Commodities yesterday. WTI and Brent shed 1.8% and 1.3% respectively to US$77.4/bbl and US$82.3/bbl. Gold (-2.3%) also paid back some of Friday’s gains to close at US$1151/oz. On the subject of Gold, there is a Swiss referendum scheduled at the end of the month in which voters will be asked whether or not the Swiss National Bank should increase its Gold reserves to 20% from 8% currently. Early opinion polls are generally mixed on the subject but it does come at a delicate time for policy making for the SNB. The Swiss Franc has rallied to within 0.2% of its 1.20 level versus the Euro after having appreciated about 2% YTD against the neighboring currency.
Switching tracks to Asia there has been some interesting headlines coming out of the APAC meeting in Beijing overnight. The notable story centers on the agreement signed by Russia and China with the former to supply gas to China marking the second such deal this year between the two nations. The deal is notable given that it would mean Russia should be able to reduce its dependence on Europe as a customer and instead focus on further boosting its strategic ties with China, particularly as this comes on the back of heightened tensions around the Ukraine and continued threats of sanctions from the US and EU. Elsewhere at the gathering, there was a notable public meeting between President Xi from China and Prime Minister Abe of Japan. The meeting marks the first time that the leaders have officially come together since 2012 with Abe commenting afterwards that ‘Japan and China made the first step in improving relations by going back to the original point of a strategic relationship of mutual benefit.’
Staying in the region and looking at markets, Chinese equities are flat after opening strongly whilst the Hang Seng is +0.5% following yesterday’s rally as investor sentiment received a boost post the announcement of the Shanghai-Hong Kong Connect. Meanwhile we’ve had trade data out of Japan. They reported a September current account surplus of JPY963bn yen (vs. JPY538bn expected), significantly higher than the JPY287bn surplus print we saw in August. The Nikkei has risen 2.1% following the results whilst bourses in the rest of Asia are generally trading firmer. Asian credit markets are also fairly resilient with benchmark names around 1bps tighter.
Before we look at the day ahead we'll just wrap up the European market moves yesterday. The Stoxx 600 closed +0.7% whilst Main and Xover finished the day 2bps and 10bps tighter respectively. With limited news flow some solid corporate earnings reports appeared to offset a weaker industrial production print out of Italy (-0.9% mom vs. -0.2% mom expected). Bunds closed +2bps wider whilst 10y yields in Spain were 3bps tighter on the day, shrugging off any worries over a political backlash in Spain following the results in the informal non-binding Catalan referendum.
Looking ahead to today we’ve got a fairly light calendar in the region which isn’t surprising given the US holiday. The October small business optimism print is the only US release to look forward to. Outside of the US, we’ve got retail data due out of the UK and the wholesale price index print in German. On a quiet day like this maybe its also worth keeping an eye on any interesting snippets arising from the conclusion of the 2-day APEC leader’s summit in Beijing today.
Let's see if these quieter markets continue.
