Once again it is all about central banks, with early negative sentiment heading into Asian trading – following the disappointing announcement from the PBOC about “ample liquidity” leading to the 6th consecutive drop in the Shanghai Composite while the PenNikkeiStock index tumbled yet again - completely erased and flipped as Mario Draghi spoke, although not to explain his involvement with the latest European derivative window-dressing scandal, but to announce that he is, once again, “ready to act” (supposedly through the OMT, which despite the best hopes to the contrary, still DOES NOT OFFICIALLY EXIST) and that while it is up to government to raise growth potentials, growth would “partly come from accommodative policy.” In other words, ignore all BIS warnings, for Europe’s unaccountable Goldmanite overlord Mario Draghi continues to promise more morphined Koolaid (read record Goldman bonuses) to any banker that comes knocking.
Sure enough, European stocks are now trading at session highs, and European optimism that the monetary spigot is still quite open has pushed US equity futures to their respective session highs as well.
In other news, formerly-exiled (and pardoned by donor recipient Bill Clinton) Glencore founder Marc Rich has died in Switzerland at age 78.
The crash in the Indian Rupee and the precious metal complex was already noted, even if bond yields are modestly tighter, both across the European periphery as well as the 10 Year which was down to 2.57% at last check. Alas, not so much Indian 2022 bonds, which are now 9 bps wider to 7.77% and surging.
And just to provie that it is indeed, “all about the Central Banks at the moment”, this is precisely how DB’s Jim Reid begins his daily comment of the day. To wit:
It’s all about the Central Banks at the moment - a comment that we’ll probably continue to make many times over the next few years. On balance the PBoC is edging out the Fed as the main concern for markets at the moment. Its also providing us with pretty volatile intra-day markets. Indeed, as we went to press with the EMR yesterday, the Shanghai Composite index was trading at a low of – 5.5% before staging an impressive come back to finish the day relatively unchanged (-0.2%) on the back of some somewhat reassuring comments from PBoC officials. The PBoC’s comments mostly downplayed the concerns around liquidity and money market rates saying that liquidity was partly a seasonal factor.
A number of domestic newswires have also run editorials overnight suggesting that liquidity will return to the banking sector after month-end. Looking out to the rest of this week, it’s very likely that we’ll see more headlines from PBoC officials with Shanghai’s annual Lujiazui Forum (a financial conference) starting tomorrow and continuing through until Saturday. This forum is co-sponsored by the PBoC, the local banking, securities and insurance regulators.
As we type this morning, the Shanghai Composite is trading about 0.9% lower with financials down 2.6%. Onshore money market rates remain elevated though newswires are reporting that the PBoC has intervened to inject liquidity through open market operations overnight. Elsewhere in Asia, sentiment is more stable this morning with gains seen on the Hang Seng (+1.0%) and KOSPI (+0.2%). S&P futures are trading about 5pts lower (-0.3%). There have been large moves seen in Asian credit which is getting squeezed tighter amidst the better market sentiment – the IG index is trading around 10bp tighter overnight. The CDS of higher beta EM sovereigns such as Indonesia are around 25bp tighter.
Back to China, whether or not the liquidity picture eases, there is concern building that what’s happens so far will impact loan growth over the coming 1-2 months and to real economic growth. In terms of the observable indicators, the one-year yields on local AAA corporate debt has spiked 121bp to 5.15% according to the South China Morning Post citing data from ChinaBond. At the same time, bond sales slumped to RMB158 billion for the month of June, the least in 17 months and down 57% from May. The article says that at least 11 companies have delayed bond sales this week alone and about RMB7 billion of offerings have been postponed. Whether the banking system liquidity issues lead to a longer term slowdown in credit growth, remains to be seen, but constrained banking liquidity appears to have limited the ability of companies to raise funds from the bond market for the time being.
Returning to yesterday’s session, we noted the interesting interplay between USTs, equities and credit. Starting with USTs, 10yr yields reached a low of 2.48% during the European session, but the subsequent release of some upbeat US data helped 10yr yields close at a high of 2.61% at the end of US trading. Interestingly, the S&P500 remained firm throughout the session, even reaching an intraday high of +1.3% (close 0.95%) despite the +13bp move upwards in US rates. Similarly the CDX IG credit index rallied into the close to finish at the day’s tights. This was in contrast to Monday when we saw softness in both equities and credit as yields spiked briefly up to 2.66%.
Much of the move up in yields was attributed to some fairly strong US data. This was interesting given that the data collection/survey periods were all prior to June’s FOMC. Consumer confidence for June came in at a cyclical high of 81.4 (vs 75.1 expected) as consumers’ assessments of both future expectations (89.5 vs. 80.6) and present conditions (69.2 vs. 64.8) improved on the month. DB’s Joe Lavornga notes that the cut-off date for the June survey was the 13th, so the preliminary results were collated prior to the momentous FOMC meeting. Durable goods orders for May rose 3.6% (vs 3.0% expected). The Case-shiller home price index for April increased 1.7% (vs 1.2% expected). On a year-on-year basis, the index has risen 12% for its strongest annual gain since March 2006.
Outside of the PBoC, a number of central banks were also active yesterday in supporting sentiment. The ECB’s Coeure said that there “should be no doubts that our exit (from current policy stance) is distant and our monetary policy is and will remain accommodative“. Coeure added that the ECB has been speaking with market participants on the potential for negative deposit rates and the central bank stands “technically ready” for this measure. A similar message was also given by Draghi and Liikanen. Draghi said the Euro area still requires loose monetary policy and OMT is needed more than ever, which was somewhat timely given that periphery European bond yields are at or near YTD highs. Outgoing BoE Governor Mervyn King said markets had “jumped the gun” about when central banks were likely to start raising interest rates after the Fed comments.
Turning to the day ahead, we have another round of speakers from the ECB (Asmussen and Mersch) during the European trading day. In the US, Q1 GDP revisions and mortgage applications are the main data releases.
And SocGen’s recap:
It has taken statements by three Fed officials, ECB president Draghi and BoE governor King, but at least we saw some degree of normality returning yesterday as volatility eased off in FX and the VIX index dropped a full 3.5pts from Monday’s 21.93 high. The PBoC too has been credited for helping to restore stability, even though the funding situation in China remains strained. At yesterday’s fixings, 1-month CNY libor was set at 8.418%, nearly 400bp above the rate a month ago.
Stocks ended the session higher on both sides of the Atlantic despite a further back up in US yields after strong data for consumer confidence and new home sales. Seven straight sessions of higher yields have been registered and the tactic of selling rallies will not be abandoned soon as the UST 10y climbs over 2.60%. Mortgage applications data may provide a more sobering picture as mortgage rates surge, but this will not turn the tide and we reckon the advent of debt supply will keep yields and swaps in the ascendency into next week. That should keep the generally USD-bid tone intact, though chinks in the armour have started to appear with oversold currencies trying to cut their losses. Positioning looks interesting in that post-FOMC liquidation of USD longs by speculative accounts did not slow the USD rally. Tactics may well be reversed and give the greenback another tailwind.
The demarche from president Draghi yesterday on the OMT shows the lengths to which the ECB is prepared to go and how the game has effectively changed outside the US since the FOMC roiled bond markets worldwide last week. In the eurozone as well as in the UK, money market futures have sold off dramatically, pushing 2014 rates to levels that imply a tightening in monetary policy next year. The steepening has also seen short-term borrowing costs rise sharply; cue the results yesterday of Spain’s 3-month and 9 month bills auctions. With the eurozone economy still limping along, one wonders what the ECB might do if yields keep pushing higher. Verbal intervention will suffice for now, but it could take bold policy steps to stop funding costs from rising even further. With 10y gilts having added 40bp in a week, no wonder BoE governor King in his final testimony yesterday lamented the premature judgement of people thinking a return to normal interest rates is imminent. It is a view incoming governor Carney will undoubtedly share when he takes office in Threadneedle Street on 1 July.
    
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