While US equity futures are largely unchanged, if only ahead of
the now daily pre-open market-wide ramp, things in Asia have
continued on their bubbly flurry, where China's Shanghai Composite
briefly rose above 4000 for the first time since 2008, but it was
the surge in the Hong Kong stock market that showed the Chinese
bubble is finally spilling over, in the form of a blistering rally
on the Hang Seng which rose nearly 4% on immense volume which at
250 billion Hong Kong dollars ($32 billion) was three times the
average daily volume over the past year and nearly 20% more than
the previous record volume day in October 2007, at the height of
the pre-financial crisis bubble.
According to the WSJ, there were several causes for the surge in
cash leaving the mainland for Hong Kong: "China's securities
regulator announced at the end of March that mutual funds could
access the Stock Connect, which was previously limited to wealthy
individual investors. More broadly, mainland investors may suddenly
see Hong Kong's stocks as bargains now that their hometown shares
have risen so high. Before Wednesday, shares of the exact same
company that are dual listed in Hong Kong and Shanghai were trading
at an average premium of nearly 35% in Shanghai. Winners Wednesday
included companies that trade at a big discount in Hong Kong, such
as the major Chinese banks."
The other main event that comes hours after Saudi Arabia
announced it would play hardball and instead of leaving its own
production flat, it is boosting production quite sharply to claw
back market share, leading to an announcement overnight that Shell
would agree UK energy producer BP Group PLC in a whopping $70
billion deal, the 14th largest ever corporate takeover. The
deal is the the latest sign of how tumbling energy prices are
shaking up the global oil-and-gas industry, and shows that even
further production surges are likely on the horizon as overheads
are cut to allow for lower breakeven prices, meaning yesterday's
massive 12.2 million barrel API inventory build will only get worse
from here, just as US storage capacity is rapidly approaching its
maximum.
As the
WSJ describes it, BG shareholders will get 383
pence in cash; and 0.4454 Shell B shares for each share held,
giving them 19% of the enlarged group, which will be one of the
world’s leading liquefied natural gas firms. The price is a 50%
premium to BG’s closing share price of 910.4 pence on Tuesday. The
deal brings together two companies that have been buffeted by a
sharp drop in oil and gas prices since last summer and would enable
the two European energy giants to eliminate overlapping costs to
help compensate for the toll that lower oil prices have taken on
their top lines.
As a result shares in Shell fell 5% in early trading in London,
while BG stock rose 37%. The deal provided a lift to European
stocks, with the oil-and-gas subindex of the Stoxx Europe 600 index
surging 5.5% in early trade Wednesday.
With the exception of the FTSE 100, European equities currently
trade in a relatively mixed manner with no sustained direction amid
light newsflow and a scarce economic calendar. The FTSE 100 is the
notable outperformer thus far given the blockbuster GBP 47bln
takeover deal of BG Group (+37%) by Shell, with the deal being the
14th largest in corporate history and would lead to a combined
index weighting of around 9.5%. With this in mind, energy names
outperform across Europe with the likes of BP (+3.2%) and Total
(+1.2%) also supported by the potential for further M&A
activity in the sector. Elsewhere, there is some minor
underperformance in the DAX, with auto-names lower after a negative
broker move for BMW at Kepler Cheuvreux. In fixed income markets,
European paper trades higher this morning with net supply for
Europe positive this week, which subsequently saw the German Schatz
print a record low yield ahead of the latest 2yr offering from the
Buba, which was relatively well received and saw a minor uptick in
the Schatz future. In contrast, the lacklustre take-up (b/c 1.19)
at the DMOs 5yr auction led to a minor downtick in UK Gilts.
In FX markets, the USD-index has ebbed lower ahead of the FOMC
minutes release from the previous meeting which was perceived as
dovish at the time after as the committee forecasted slower and
more gradual hikes. As such, some of the USD’s major counterparts
have been provided some minor support throughout the session with
GBP also being lifted by the prospect of Shell changing currency
into GBP in order to complete their purchase of BG Group, according
to some analysts. Furthermore for GBP, there is a GBP 900mln option
expiry in GBP/USD at 1.4900 due to roll off at the 10am NY cut. JPY
also remains stronger throughout the European session after the BoJ
stood pat on their existing monetary policy despite some outside
bets for action by the central bank.
In the energy complex, the sector has failed to benefit from the
weaker USD with focus instead on yesterday’s API release saw a 4th
straight build in oil stockpiles at 12.2mln vs. Prev. 5.2mln, the
biggest build since Feb 18th. In terms of other energy related
commentary, Saudi Arabia's (OPEC’s largest oil producer) oil
minister Naimi said the country is ready to bring stability to the
oil market. However, the latest production data shows that Saudi
output for March is at a record high of 10.3mln bpd. Precious
metals markets, spot gold and silver trade relatively unchanged
while Industrial metals slipped overnight paring back yesterday’s
gains with nickel falling over 3% with growing uncertainty over
China’s struggling property sector. Furthermore, iron ore futures
remained weak amid growing stockpiles and suppressed demand
continuing to weigh down on the raw material
In summary:European shares rise, with oil &
gas and basic resources sectors outperforming and autos, tech
underperforming. BG accounts for ~75% of the index’s current
advance. The U.K. and Swiss markets are the best-performing larger
bourses, Dutch the worst. The euro is stronger against the dollar.
German 10yr bond yields fall; French yields decline. Commodities
drop, with WTI crude, natural gas underperforming and nickel
outperforming. U.S. mortgage applications, due later.
Market Wrap
S&P 500 futures unchanged
Stoxx 600 up 0.3% to 405.5
US 10Yr yield little changed at 1.88%
German 10Yr yield down 2bps to 0.17%
MSCI Asia Pacific up 1.4% to 151.1
Gold spot little changed at $1209.4/oz
Eurostoxx 50 little changed, FTSE 100 +0.4%, CAC 40 +0.2%, DAX
-0.2%, IBEX little changed, FTSEMIB little changed, SMI +0.2%
MSCI Asia Pacific up 1.4% to 151.1; Nikkei 225 up 0.8%, Hang
Seng up 3.8%, Kospi up 0.6%, Shanghai Composite up 0.8%, ASX up
0.6%, Sensex up 0.6%
Shell Will Buy BG Group for $70 Billion in Cash and Shares
Euro up 0.4% to $1.0857
Dollar Index down 0.3% to 97.53
Italian 10Yr yield down 0bps to 1.24%
Spanish 10Yr yield up 0bps to 1.18%
French 10Yr yield down 2bps to 0.45%
S&P GSCI Index down 0.7% to 415
Brent Futures down 1.2% to $58.4/bbl, WTI Futures down 2.2% to
$52.8/bbl
LME 3m Copper down 0.1% to $6056.5/MT
LME 3m Nickel up 1.6% to $12745/MT
Wheat futures up 0.1% to 526.8 USd/bu
Bulletin headline summary from Bloomberg and
RanSquawk
The FTSE 100 outperforms its continental peers following the
14th largest ever corporate takeover after Shell agreed to buy BG
for USD 70bln
Elsewhere, newsflow remains quiet with the USD-index trading
lower ahead of today’s FOMC minutes release
Looking ahead, today sees the release of Fed minutes, DoE crude
oil inventories and Greece's PM Tsipras is due to meet with Russian
President Putin, with a joint statement expected at 1730BST
Treasuries gain before Fed releases minutes of March meeting,
week’s auctions continue with $21b 10Y notes. WI yield 1.89%,
lowest since May 2013; drew 2.139% in March.
German factory orders fell 0.9% in Feb. after a revised decline
of 2.6% the previous month; median estimate in Bloomberg survey was
for gain of 1.5%
Chinese developers target lower growth for new-home sales this
year, as prospects for the real estate market remain in doubt even
after the government eased monetary policy and lifted curbs on
housing purchases
Greece hasn’t asked Russia for financial aid; all issues of
debt, financing have to be resolved within EU framework, according
to a Greek government official
The BOJ kept policy unchanged, with Kuroda saying the economy
faces less risk now than it did last year when the central bank
boosted monetary stimulus to an unprecedented level
Royal Dutch Shell agreed to buy BG Group for about GBP47b
($70b) in cash and shares, the oil and gas industry’s biggest deal
in at least a decade; could set series of mergers in motion as
energy cos look to cut costs The acquisition is the most
significant response yet to the slump in oil prices and
Saudi Arabia increased oil production in March to the highest
in at least 12 years and expects crude prices to rise in the “near
future,” according to oil minister Ali al-Naimi
Oil prices could tumble $15/bbl next year if sanctions are
lifted following a final nuclear deal with Iran, according to the
Energy Information Administration
China’s anti-graft agency is investigating if former central
bank chief Dai Xianglong used his government posts to enrich his
family, said people familiar with the matter
Rahm Emanuel outdistanced a lesser-known challenger to win a
second term and the daunting prize of steering Chicago away from
financial collapse, including $20b of unfunded pension debt
Sovereign bond yields mostly lower. Asian stocks gain, European
equities mostly lower. U.S. equity-index futures higher. Crude oil
lower, gold little changed, copper falls
US Evvent Calendar
7:00am: MBA Mortgage Applications, April 3 (prior 4.6%)
8:00am: Fed’s Powell speaks in New York
9:30am: Fed’s Dudley speaks in New York
2:00pm: Minutes of FOMC March 17-18 mtg
1:00pm: U.S. to auction $21b 10Y notes in reopening
DB's Jim Reid concludes the overnight event
summary
Its FOMC minutes day today and also the unofficial start of Q1
earnings as Alcoa reports after the closing bell. The minutes will
be interesting as this was from the meeting a few weeks ago where
the Dollar strength perhaps came up more than people anticipated.
So it'll be interesting if we hear more details. Any hawkish
comments on rates will likely be tempered by Friday's weak payroll
numbers so the minutes are a little behind the curve but
interesting nevertheless. As longstanding proponents of the view
that US rate hikes in 2015 will be very difficult to achieve,
recent data has gone our way. However we should be aware that Q1
GDP has been consistently poor in recent years and perhaps there is
some seasonal distortion that has not been fully factored in the
stats. DB's Joe Lavorgna reminded us yesterday that over the last
five years, Q1 real GDP growth has averaged just 0.6% (a still weak
1.3% if we remove last year’s large -2.1% Q1 drop). The averages
for the rest of the year have been 3%, 3.1% and 2.6% over the
remaining quarters. So food for thought.
On the subject of economic growth, the IMF yesterday warned in
their Economic Outlook that they expect a prolonged period of low
growth globally, with the slowdown for emerging markets expected to
lead. Perhaps more interesting, the IMF suggested that the slowdown
in potential output growth goes beyond the financial crisis in
2008, citing an aging population and slowdown in productivity
growth in EM’s in particular while also stating that ‘a large share
of the output loss since the crisis can now be seen as permanent
and policies are thus unlikely to return investment fully to its
pre-crisis trend’.
Before we recap yesterday’s price action, the main focus in Asia
this morning is on Japan where the BoJ has kept its QE programme on
hold at ¥80tn annually as expected, having voted 8-1 in favour of
holding (the 1 not in favour voting for a cut to ¥45tn). The
associated press statement is due out shortly after we go to print
while a Bloomberg survey is showing that expectations are still for
further stimulus with 22 out 34 economists expecting stimulus
expansion by the end of October. The Nikkei (+0.87%) is higher
following the announcement while the Yen is 0.3% firmer versus the
Dollar. Elsewhere, markets are mixed. The Hang Seng (+2.38%) is
playing catch up having been closed yesterday while the Shanghai
Comp (+0.12%) and CSI 300 (+0.21%) have reversed earlier
losses.
Moving onto markets yesterday, having traded some +0.4% firmer
for much of the day, US equity markets retreated in the last hour
of trading to close in the red. Indeed, the S&P 500 (-0.21%)
and Dow (-0.03%) closed down to halt two previous days of gains as
a late sell off in utility stocks in particular helped drag bourses
down. There was no such reversal in the Dollar however as the DXY
closed +1.09%, wiping out the weakness seen post payrolls on
Friday. Treasuries were a touch more subdued meanwhile, the
benchmark 10y yield 1bp tighter at 1.885%. Energy stocks (+0.31%)
once again outperformed as WTI (+3.53%) and Brent (+1.69%) extended
their gains this week. The latest leg up was supported by the news
that the EIA has cut its forecast for US oil production in 2015 to
9.23m barrels a day, a decrease of 120k barrels. On the subject of
oil, headlines that Shell is in talks to acquire BG Group also
caught our eye late last night. The FT is reporting that the deal
could be announced as soon as Wednesday and could be worth over
$60bn, rivaling 3G and Berkshire Hathaway’s agreement to buy Kraft
foods two weeks ago in a deal which would give the merged company a
market value twice that of BP. In fact M&A is proving to be
much more of a theme this year with risk appetite clearly on the
up. The proposed deal adds to the likes of the Pfizer and Hospira
deal and also Hutchinson Whampoa and O2 deal seen so far this year.
During the first quarter along, merger volumes in fact rose 24% to
$874.1bn.
Data in the US yesterday was supportive on the whole. JOLTS job
openings, which are a little outdated given the latest payrolls
print, came in at 5.13m in February, up from 4.97m and ahead of
expectation of 5m. In the details, the quits rate fell one-tenth of
a percent to 1.9%, at the top end of the 12-month 1.7% - 2.0%
range. The hiring rate meanwhile was unchanged at 3.5%. Elsewhere,
the IBD/TIPP economic optimism print for April came in above market
(51.3 vs. 49.0 expected). Consumer credit was also strong with the
$15.52bn reading ahead of expectations of $12.5bn. There was more
dovish Fedspeak yesterday too, as Minneapolis Fed President
Kocherlakota reiterated that the Fed should wait until 2016 to hike
while suggesting that a move in the second half of that year might
be more appropriate. The non-voter also suggested that ‘it would
then be appropriate under my outlook for the FOMC to raise the
target range for the fed funds rate thereafter to about 2% by the
end of 2017’, making the point that it would be better for the Fed
to be ‘late and slow’.
Closer to home yesterday and after returning from holiday’s,
markets in Europe appeared to be playing catch up as the Stoxx 600
(+1.64%), DAX (+1.30%) and CAC (+1.52%) all rose. Credit markets
also had a better day as Xover finished 6bps tighter. Sovereign
bond markets remained well supported. 10y Bunds closed 0.8bps
tighter while peripheral yields were 4-7bps tighter. Yesterdays PMI
indicators helped support the better tone. The final March reading
for the Euro-area composite rose +0.7pts to 54.0, one-tenth of a
point down on the flash reading. The final services PMI was also up
+0.5pts versus February to 54.2. Regionally, the composite PMI rose
in Germany (+1.6pts), Italy (+1.4pts) and Spain (+0.9pts) to 55.4,
52.4 and 56.9 respectively while there were falls in Ireland
(-0.9pts) to 59.8 and France (-0.7pts) to 51.5. Our colleagues in
Europe noted that both the PMI’s and national surveys point to an
increase of +0.4% qoq in Euro-area Q1 GDP. That said, they believe
that the Euro-area hard data is consistent with their +0.5% qoq GDP
projection. Finally, the UK composite PMI reading of 58.8 was over
2pts higher than the February reading and the highest since August
last year.
Elsewhere in Europe, the ECB yesterday announced that it reached
its purchase program target of €60bn in March – the first month of
operation. Looking at the breakdown, total purchases over the month
amounted to €47.4bn of which supranationals accounted for €5.7bn
(12% of total). The remainder was made up of purchases of covered
bonds and ABS. Digging deeper into the details, our colleagues in
Europe noted that of the 19 countries in the Eurozone, the ECB did
not purchase any public sector securities in Greece (not eligible
collateral), Cyprus (not eligible as review in progress) or Estonia
(likely lack of eligible securities). They note that the average
maturity of purchases was in fact skewed towards the longer end in
the periphery and the front end in core countries.
Based on this, they believe that the details of the purchases
suggest a marginally more aggressive stance than they would have
anticipated. Firstly, the share of purchases in countries which are
either ineligible for the program or do not have sufficient
securities has been redistributed towards other countries rather
than supranationals. This would suggest that if the programme hits
limits for some of the larger core countries (such as Germany), it
would imply an increase in proportion of purchases of peripheral
securities. Although not relevant for now, it is nevertheless
suggestive of a potentially more powerful credit easing if QE needs
to be continued for longer than currently anticipated. Secondly,
the greater weighted average maturity of purchases relative to the
average life of eligible securities in the periphery helps to
offset their concern about the impact of the supply response in the
periphery.
Staying on the topic, the ECB’s Mersch was yesterday quoted in
German press (Boersen-Zeitung) as saying that the ECB is free to
adjust the pace of its QE programme if it advances quicker than
expected towards lifting inflation. Specifically, Mersch said that
‘if we were to see that this path brings us to our goal faster, we
are of course not bound by our decision in a way that we couldn’t
adjust it’, noting also that this holds true not reaching the goal
too.
Turning over to today’s calendar, it’s a fairly quiet morning
data wise with just German factory orders and French trade data and
Euro-area retail sales due. With no data due for release in the US
this afternoon, attention will of course be on the aforementioned
FOMC minutes and the start of Q1 earnings season.
