From Zero Hedge
Another day full of global macroeconomic disappointments is certain to send the S&P500 to all time-higherest records as 100,000 or so E-mini contracts exchange hands between central banks and Citadel’s algos.
It started with the shocking NRF announcement that US holiday sales cratered 11% over the extended Thanksgiving weekend (which the NRF blamed on an “improving economy”, to which even Goebbels bows down his head), but also China’s latest manufacturing print miss expectations for the 2nd month in a row and drop to 8 month low, and moments thereafter, Eurozone releasing a downward revision to its October PMI data, with the all-important German PMI now openly in contraction, revised down from 50.0 to 49.5.
And the punchline: the basket case that is Japan was finally downgraded by Moody’s to A1 from Aa3 by Moody’s which sent the USDJPY first to a new 7-year high at 119.14, only for USD/JPY to fall to new session low at 118.08 as everyone now realizes the Japanese endgame is just around the corner. Perhaps that is why after sliding 2% overnight, gold and silver have retraced all losses and are now higher from the Friday close, which however is more than can be said for copper down over 3% (thanks China) and of course crude, with both Brent and WTI declines continuing this morning as concerns of a sweeping global recession will sink future energy demand.
Looking at Europe’s PMI, the final number printed at 50.1 in November, 0.3pt below the Flash estimate (and the consensus) and 0.5pt below the October reading. The German final Manufacturing PMI for November was revised down 0.5pt to 49.5, contracting for the first time in years, while the French Manufacturing PMI recorded a 0.8pt upward revision to 48.4. The Italian Manufacturing PMI was unchanged from the level recorded in October (49.0), against expectations of a small increase (Cons: 49.4). By contrast, the Spanish Manufacturing PMI rose forcefully by 2.1pt to 54.7, against expectations of a slight contraction (Cons: 52.1).
The breakdown in November was weak. New orders receded by 1.7pt (to 48.7) and stocks fell by 0.9pt (to 49.0), leaving the forward-looking order-to-stock ratio stable in November; following gradual declines during 2014, this ratio now stands at the lowest level since April 2013. Both production and employment declined by 0.3pt in November, respectively. With today’s final print, the Euro area Manufacturing PMI is now estimated to have fallen in November (0.5pt), unwinding the small increase seen in October. The Euro area Manufacturing PMI is now at its lowest level in more than a year, having risen sharply from July 2012 to January 2014 reverting trend since then.
As a result, European shares fall with the basic resources and oil & gas sectors underperforming and utilities, travel & leisure outperforming. Crude oil continues decline. China November manufacturing PMI below estimates, Euro-zone PMI revised lower, German PMI revised to 49.5, U.K. PMI above estimates. U.S. post-Thanksgiving sales fall 11%. The Italian and U.K. markets are the worst-performing larger bourses, the German the best. The euro is little changed against the dollar. Greek 10yr bond yields fall; Japanese yields increase. Commodities decline, with natural gas, WTI crude underperforming and gold outperforming. U.S. manufacturing PMI, ISM manufacturing due later.
Market Wrap
- S&P 500 futures down 0.5% to 2057
- Stoxx 600 down 0.6% to 345.2
- US 10Yr yield up 1bps to 2.17%
- German 10Yr yield down 0bps to 0.7%
- MSCI Asia Pacific down 0.7% to 139.7
- Gold spot up 0.1% to $1174.1/oz
Bulletin headline summary from Bloomberg:
- Treasuries decline, with 30Y yield retreating from lowest closing levels this year; oil led commodities to a five-year low as energy producers declined the most in a global stock rout.
- China’s official manufacturing PMI fell to 50.3 in Nov., an eight-month low, as factory shutdowns aggravated a pullback in the economy
- Germany’s manufacturing PMI unexpectedly shrank last month, falling to 49.5 from 51.4, in a slump that dragged factories in the euro area to the brink of stagnation
- U.S. retail sales tumbled an estimated 11% over the weekend, according to the National Retail Federation, as consumers were unmoved by aggressive discounts, longer hours; more than 6m shoppers who had been expected to hit stores never showed up
- Oil’s decline is proving to be the worst since the collapse of the financial system in 2008 and threatening to have the same global impact of falling prices three decades ago that led to the Mexican debt crisis and the end of the Soviet Union
- The “shock therapy” of a steep drop in crude prices, which have fallen to a five-year low, is no solution for OPEC’s loss of market share to U.S. shale producers, Iran’s Oil Minister Bijan Namdar Zanganeh said
- U.K. manufacturing growth unexpectedly accelerated in November, with Markit’s manufacturing PMI rising to 53.5 from 53.3, as domestic demand strengthened
- Moody’s cut Japan’s credit rating, a setback to Prime Minister Shinzo Abe a day before he begins campaigning for an election that he wants to focus on the economy.
- Sovereign yields mixed. Asian stocks mostly lower; European stocks, U.S. equity-index futures decline. Brent crude falls, WTI tumbles below $65/bbl to lowest since July 2009; gold higher, copper plunges 3.2%
DB’s Jim Reid as is customary concludes the weekend recap
Wrapping up Friday’s market moves, the further sell-off in Oil weighed on the broader market tone although overall equity and credit markets were relatively resilient. For Oil we saw WTI (-10.23%, playing catch up after Thanksgiving) and Brent (-3.35%) close at $66.15/bbl and $70.15/bbl, respectively. They have also moved lower overnight (more below). The S&P 500 (-0.27%) was dragged down by the Energy (-6.26%) component on the day but this was somewhat offset by gains in Consumer Staples (+1.22%), Consumer Discretionary (+1.17%) and Utilities (+1.07%).
Airlines in particular were also a key beneficiary of this move lower in Oil as the sector sub-index rallied nearly 6% on Friday. Speaking of Consumers, the post Thanksgiving weekend also marks the unofficial start of the Holiday shopping season. Early estimates are in for retail sales in the US over the four day Cyber Monday weekend, with the National Retail Federation reporting an estimated 11% fall compared to 2013 to $50.9bn.
It appears that sales at bricks and mortar stores have held in firmer however, with ShopperTrak reporting a 0.5% fall to $12.29bn on Thursday and Friday. The FT reports that the downward trend might not tell the entire picture however, with many stores commencing sales in mid-November in a bid to catch customers early and triggering an earlier shift in spending patterns – making it hard to determine overall consumer sentiment. Indeed it used to be just black Friday that was the focal for discounts. Now its spread across a longer period prior to this and after.
Turning to the fixed income markets the continued strength in Treasuries was one of the key highlights for US fixed income markets on what was otherwise another weak day for Oil & Gas credits. Starting with rates, the 5yr and 10yr benchmark Treasury reopened following Thanksgiving some 8bps lower in yield before closing at 1.48% and 2.16%, respectively.
The 10yr in particular is just whiskers away from the October 15th closing lows of 2.136%. In the world of Credit, US IG spreads were broadly unchanged at the index level as opposed to a +7bp widening in US HY. The oil & gas sector extended their move wider with IG and HY energy spreads closing +4bp and +37bp wider at 157bp and 624bp on the day, respectively.
As the stresses in US HY energy credits continue to build there seems to be increasing chatter of whether this current move in Oil will drive the next default cycle. Our US credit strategists have recently said that WTI at around $75 is already low enough to see first signs of stress materializing among the weakest names. At these levels our US strategists estimated pure energy sector contribution to US HY default rate at less than 1%, and pushing the headline rate to 3.5%, up from 1.7% currently. Given we’ve past the $75 mark at WTI, our colleagues noted that at $60 WTI, if sustained for a considerable time, could be sufficient to push the overall energy sector into distress. Clearly still a developing story that should keep everyone on their toes for now.
Closer to home, CPI and unemployment data for the Euro-area on Friday did little to excite the market after coming in line with consensus. However there were some interesting comments out of the ECB’s Lautenschlaeger ahead of the central bank meeting this week, commenting on the already depressed rates, specifically in Spain and Italy, and whether public QE would necessarily see a positive outcome.
As mentioned part of the interest this Thursday may well be on whether we see a consensus for further action – it’ll be interesting to see if we hear any conflicting statements in the lead up this week. Just wrapping up the weekend news, the results from the Swiss referendum were released and showed the Swiss – as expected – comprehensively reject the proposal to force the Swiss National Bank to hold 20% of its balance sheet in Gold. The commodity is some 1.4% weaker this morning on the back of the result.
Turning to the Asian session overnight we are seeing further pressure in Oil with both WTI (-2.65%) and Brent (-2.67%) extending their declines to trade at $64.44 and $68.15 as we go to print. Bourses are trading mixed on the back of the moves with the Nikkei +0.64%, Hang Seng -1.97%, Kospi -0.79% and Shanghai Composite -0.05%.
China appears to be the major source of headlines this morning, starting with the early data print for the week which shows a relatively subdued HSBC manufacturing PMI. The 50.0 reading in line with expectations but down from 50.4 in October. Looking at the breakdown, large companies (mainly SOEs) are still above 50. However, SMEs are trending below the 50 level which suggest that financial conditions for them remain poor.
More on China, local news reported that the PBOC plans to officially launch the long-awaited deposit insurance scheme in January 2015. Whilst the timing of the implementation is in line with our DB Chinese banks analyst Tracy Yu’s expectation, the details of the scheme are still unknown. Overall whilst the implementation of the scheme may weigh slightly on banks’ earnings, Tracy believes it should help lower the system’s funding costs and reduce the systematic risks as interest rates become increasingly deregulated.
Quickly coming back to the aforementioned ECB meeting this week, our European economists are not expecting the central bank to announce any new material policies on Thursday. DB’s Mark Wall notes that although Draghi’s last speech was dovish, this was rather more of a justification for actions already taken rather than a prelude to imminent action. Looking ahead to Thursday, Mark notes two contingencies need to be met in order for the ECB to act again.
The first being if the ECB concludes that current measures are insignificant to meet the €1tn goal. We note however that in his 21st November speech, Draghi expressed confidence in the capacity of TLTRO and ABS/covered bond purchases and this, combined with a ‘wait and see mode’ that council members typically adopt, makes us believe that it would be particularly hasty for Draghi to deem the current programme ineffective at this stage.
The second contingency centers on the medium term outlook for inflation deteriorating, however our colleagues note that it’s unlikely that the expected upcoming downward revisions will be enough to force the ECB to act at this stage. The interest however this Thursday will be how Draghi’s rhetoric keeps the market confident moving into 2015 and provides some evidence of consensus for further action building in the camp……
