Bear Market Rally Fizzles: Global Stocks Down On BOJ Disappointment; Oil Slides For 2nd Day

Was that it for the great February/March bear market rally?

After soaring by 200 S&P point from the February 11 lows, the S&P 500 appears to have finally hit a resistance at a point where GAAP P/E is now a frothy 23x, and where even Goldman says the S&P500 is overvalued based on conventional market valuation metrics. Perhaps it was the fundamentals finally catching up, or perhaps it was disappointment that the BOJ added nothing new to the stimulus menu, after last week’s Draghi’s bazooka, and coupled with the stunning announcement by China it was willing to launch a Tobin Tax, a move that confirms that under the surface China’s capital flight is accelerating, overnight global markets and US equity futures have dropped while the yen jumped the most in a week.

What is surprising, is that not even a week after Draghi’s bazooka, some are already concerned it won’t be enough: “Monetary policy does not work without fiscal reform,” Brett McGonegal, chief executive officer of Capital Link International, told Bloomberg TV. “You can keep the monetary stimulus going, but if you’re not changing anything and there’s no reform going on, you’re at this point where it’s not going to work.”

Also notable is that oil has continued its decline for the second day, and at last check WTI was down $1, or over 2% – the lowest price in a week – as focus returns to the market oversupply, Russia signalling Iran won’t join a production freeze (which means neither will Kuwait, and likely most other OPEC members) and today’s API inventory data today which will forecasts another big inventory build at Cushing. As a result, there has been notable weakness among commodities, with currencies of resource-exporting nations sliding as copper and gold prices fell, while iron ore, last week’s record highlight short squeeze, plunged the most in eight months.

“Market participants now appear to be paying greater attention to the current oversupply again,” Commerzbank analyst Eugen Weinberg says in a note. “The primary focus is on Iran, which for understandable reasons is refusing at the current time to sign up to any agreement to cap production.”

Adding more pressure on the rally, Bloomberg explains that while world equities have staged a comeback since reaching a two and a half-year low in mid-February, “so far there are few signs that monetary easing in China, Europe and Japan is pulling the global economy out of a slump. The BOJ’s decision to maintain policy was forecast by most economists and the authority said it’s prepared to ease further if needed to revive inflation expectations. The European Central Bank announced unprecedented stimulus last week, while the Federal Reserve will conclude a review on Wednesday and the Bank of England a day later.”

“Monetary policy does not work without fiscal reform,” Brett McGonegal, chief executive officer of Capital Link International, told Bloomberg TV. “You can keep the monetary stimulus going, but if you’re not changing anything and there’s no reform going on, you’re at this point where it’s not going to work.”

But as we wrote yesterday, the one event that will truly make or break the market is tomorrow’s FOMC announcement: if Yellen turns overly hawkish and there is no major revision to the dots, or – don’t even think it – the Fed shocks the market and hikes another 25 bps, then we go right back to square one, where the market was in December of 2015, terrified every time China sneezes.

Market snapshot:

• S&P 500 futures down 0.6% to 1998
• Stoxx 600 down 0.9% to 342
• FTSE 100 down 0.6% to 6137
• DAX down 0.3% to 9956
• German 10Yr yield up 1bp to 0.29%
• Italian 10Yr yield up 2bps to 1.32%
• Spanish 10Yr yield up 3bps to 1.49%
• S&P GSCI Index down 1.3% to 322.9
• MSCI Asia Pacific down 0.9% to 127
• Nikkei 225 down 0.7% to 17117
• Hang Seng down 0.7% to 20289
• Shanghai Composite up 0.2% to 2864
• S&P/ASX 200 down 1.4% to 5111
• US 10-yr yield down 2bps to 1.93%
• Dollar Index up 0.1% to 96.72
• WTI Crude futures down 2.7% to $36.18
• Brent Futures down 2.9% to $38.38
• Gold spot down 0.1% to $1,234
• Silver spot up less than 0.1% to $15.35

Global Top News

• Avon Plans to Move Headquarters to U.K. and Cut 2,500 Jobs: Will generate one-time expenses of ~$60m in 1Q, expects to generate savings of as much as $70m from the cuts by 2017
• Kuroda Holds Fire on Stimulus as Japan Digests Negative Rate: BOJ kept the target for increasing the monetary base unchanged, and left benchmark rate at minus 0.1%
• Apollo Said to Seek $700 Million for CLO Firm as New Rules Loom: New firm will issue collateralized loan obligations, as part of its effort to comply with rules designed to curb excessive risk-taking by managers of the vehicles, according to 2 people with knowledge
• Sony Buys Jackson Stake in Music Venture for $750 Million: Co. exercised right to acquire partner’s stake
• Brookfield, Qube Join Forces in A$9.1 Billion Asciano Bid: Former rival groups led by Brookfield Asset and Qube joined forces to buy Asciano in a A$9.05b ($6.8b) bid
• U.S. Steel Vows to Escalate War on Imports If Duties Fall Short: CEO Longhi vows to file 201 case if final penalties fall short
• Cliffs Natural Investors Sue for Being Shut Out of Debt Swap: Investors say Cliffs Natural has two classes of bondholders
• U.S. Ethanol Glut Begins to Test Limits of Storage Capacity: Kinder Morgan rerouted deliveries away from Illinois terminal
• Herbalife Spent $700,000 Protecting Its CEO From Threats in 2015: CEO faced threats to his well-being after Bill Ackman began accusing the company of being an illegal pyramid scheme
• Outerwall Rises 9% Post-Mkt on Strategic Alternatives, Div Boost: Hires Morgan Stanley for strategic and financial alternatives
• Question Looming Over Aubrey McClendon Crash May Go Unanswered
• GM Offers Rentals to Lyft Drivers Accelerating Challenge to Uber
• Trump Victories in Key Races Could Vanquish Kasich, Rubio
• JPMorgan Said to Prepare to Sell $1.9b RMBS: WSJ: Expected to price residential mortgage-backed deal over next 2 weeks; would hold 90% of the deal, WSJ reports
• Amazon Set to Launch Cloud Migration Service: WSJ: Thomas Publishing to transport data from own servers to Amazon’s data centers, WSJ reports
• U.S Govt May Withdraw Plan for SE Atlantic Coast Drilling: NYT

Looking at regional markets, Asian stocks traded negative following Wall St.’s lacklustre lead amid weakness in commodities, while Japan reacted to the BoJ decision to keep the policy unchanged. Nikkei 225 (-0.7%) was pressured as JPY strengthened following the BoJ decision to leave policy unchanged while also dropping its reference regarding deeper cuts into negative territory. Energy and basic materials underperformed in the ASX 200 (-1.4%) after commodity prices declined. Shanghai Comp (+0.2%) completed the somber tone with materials underperforming, while the PBoC kept its liquidity injections reserved and weakened the reference rate. 10yr JGBs traded lower and fell below 151.00 amid a lack of demand and disappointment from a lack of BoJ action.

BoJ kept policy steady with the annual rise in monetary base at JPY 80trl and interest rates held at -0.10% as expected.

• BoJ voted 8-1 to maintain monetary base and voted 7-2 to maintain its negative rate.
• BoJ said that additional easing will happen if required but removed phrase regarding cutting interest rates deeper into negative territory if deemed necessary.

PBoC sets CNY mid-point at 6.5079 vs. close. 6.5015 (Prey. mid-point 6.4913), injects CNY 20bIn via 7-day reverse repo.

Top Asian News

• Foxconn Said to Delay Sharp Deal for Clarity on Quarterly Result: Delaying finalization of its deal for Sharp to get a clear understanding of Sharp’s performance in the current qtr, increasing the chances an agreement won’t be reached this month, according to people familiar with the matter
• China Said to Draft Currency Transaction Tax to Damp Speculation: Initial rate of levy may be kept at zero, people familiar said
• Bangladesh Central Bank Chief Ready to Quit Over Cyber Heist: Atiur Rahman offers to resign
• Singapore Developers Post Lowest New Home Sales in 14 Months: Builders sold 301 units in Feb., -7% m/m
• Day of Reckoning Coming for India’s ‘Pigs With Lipstick’ Lenders: Central bank audit ending March 31 to uncover more bad debt

European markets follow on from Asia to see equities trade in the red this morning, with dampened sentiment apparent across asset classes. In terms of the session’s laggard’s, financials, material and energy names underperform , as the likes of Anglo American (-9.6%) and BHP Billiton (-5.8%) are among the worst performers in Europe. Despite the edginess in equities, fixed income have done their own thing for much of the morning, trading lower by around 20 ticks and around 161.50. Ultimately, price action could remain relatively rangebound as participants look ahead to today’s tier 1 data releases which include US Retail Sales, PPI Final Demand, Empire Manufacturing and Business Inventories.

Top European News

• Legal & General Full-Year Profit Rises on Retirement Revenue: 2015 oper. profit GBP1.46b vs est. GBP1.47b; Solvency II ratio was 169%, based on a surplus of GBP5.5b
• Antofagasta Scraps Dividend as Metal Rout Erases Most Profit: Net income ex-some items fell to $5.5m from $422.4m yr earlier, dividend scrapped as interim payment exceeds 35% payout ratio
• Sainsbury Joins Listed Supermarket Rivals Back in Growth Mode: For the first time since 2011, LFL sales are rising at Sainsbury, Tesco and Morrison; Sainsbury 4Q LFL sales rose 0.1%
• Russia Begins Syria Withdrawal as Putin Puts Onus on Assad: Jets have started to return to Russia, Defense Ministry says
• Traders Missing Rebound Yank Billions From European Stocks: U.S. traders withdraw money from euro-area ETF for fifth week
• U.K. Bond Sales Seen Jumping Most Since 2009 as Osborne Thwarted: Median forecast from dealers is for GBP139b issuance
• Italy Recovery From Recession Seen Continuing Slowly but Surely: Will extend the expansion that started last year, said 19 of 25 respondents in a Bloomberg survey published Tuesday
• Campari Agrees to Acquire Grand Marnier for $760 Million: Bid of EU8,050/shr is 60% premium to closing price

In FX, the big move this morning was expected to have been USD/JPY, but the modest dip below 113.00 was modest given the BoJ’s no change policy decision. 112.90 is the low seen here so far, and little aggressive interest to push lower from these levels seen in London. However, no such respite for GBP, which has been under the cosh since yesterday, after both NY and Tokyo sold moderate pullbacks but London more aggressively so . The latest Telegraph/ORB poll on the EU vote puts the leave camp in the lead at 49% vs 47%, but the selling began ahead of this. Cable is now in the mid 1.4100’s, while EUR/GBP is eyeing a test of the double top at .7847. Elsewhere, the USD index has ripped higher, adding momentum to Cable losses, but EUR, AUD, NZD and CAD all losing out to a more modest degree. AUD support seen in the mid .7400’s — now being tested, while USD/CAD is now close to 1.3400.

In commodities, WTI and Brent continue to slide during European trade as concerns of a global glut take hold of markets due to Iran not budging on the production freeze. Gold has rallied in the last couple of hours but it is yet to reach the highs at the beginning of the Asian sessions of 1238.13/oz. Base metals are retracing some of the moves seen yesterday after China hinted it will invest further in property sector with copper futures down nearly 1%.

After several days of quiet on the US macro front today we have a spike in data updates and the February retail sales report looks set to be the highlight where market expectations are for a -0.2% mom decline in the headline and +0.2% mom gain in the core and control group components. Also out today will be the NY Fed empire survey which is expected to remain consistent with the weakness in the manufacturing sector. The February PPI report will also be important and it’s worth keeping an eye on the healthcare subcomponent given it is used in the core PCE deflator. Also due out will be January business inventories and the March NAHB housing market index print. Away from this, tonight will see five more primaries in the US President race

Bulletin Headline Summary from Bloomberg and RanSquawk

• European equities trade lower across the board after taking the lead from Asia which saw the BoJ refrain from carrying out any additional easing
• As such, the JPY remains firmer against its major counterparts, while GBP remains out of favour as London continues aggressive selling of the currency
• Looking ahead, highlights include US Retail Sales, PPI Final Demand, Empire Manufacturing and Business Inventories
• Treasuries rise in overnight trading while global equity markets, oil sell off after BOJ refrained from additional monetary easing as they await impact of the negative rate strategy adopted in January; FOMC begins two-day meeting today.
• Deutsche Bank, whose debt plunged last month, is offering three-year notes in euros. The sale will test investor appetite for the bank’s debt following management efforts to allay concerns about capital levels
• Britain is set to increase government-bond sales by the most since the financial crisis as a cooling economy and asset- sale delays hinder plans to balance the books. Gross issuance may jump 17% in the next fiscal year
• The chances of a U.K. interest-rate cut are rising, the big risk on the horizon is June’s European Union referendum. A vote to leave the bloc could push Britain toward a recession and force the BOE to respond
• Lenders are getting stingier when it comes to funding risky U.S. real estate developments, putting pressure on landlords in need of fresh funding to keep their projects afloat
• German Chancellor Angela Merkel got her marching orders from voters to cut the flow of refugees. Now she needs Turkish President Recep Tayyip Erdogan to play along and help lift her out of a career-threatening jam
• Russia said its forces have started leaving Syria after President Vladimir Putin ordered the military withdrawal in a surprise move that puts pressure on the regime of Bashar al-Assad and opposition groups to reach a peace deal
• $8.3b IG corporates priced yesterday; MTD $94.72b, YTD $388.97b; $1.1b HY priced yesterday, $15.125b MTD
• Sovereign 10Y bond yields mostly steady; European, Asian equity markets lower; U.S. equity- index futures drop. WTI crude oil, copper, gold fall

US Event Calendar

• 8:30am: Retail Sales Advance, Feb. est. -0.2% (prior 0.2%)
  • Retail Sales Ex Auto, Feb., est. -0.2% (prior 0.1%)
  • Retail Sales Ex Auto and Gas, Feb., est. 0.2% (prior 0.4%)
  • Retail Sales Control Group, Feb., est. 0.2% (prior 0.6%)
• 8:30am: PPI Final Demand m/m, Feb., est. -0.2% (prior 0.1%)
  • PPI Ex Food and Energy m/m, Feb., est. 0.1% (prior 0.4%)
  • PPI Ex Food, Energy, Trade m/m, Feb., est. 0.1% (prior 0.2%)
  • PPI Final Demand y/y, Feb., est. 0.1% (prior -0.2%)
  • PPI Ex Food and Energy y/y, Feb., est. 1.2% (prior 0.6%)
  • PPI Ex Food, Energy, Trade y/y, Feb. (prior 0.8%)
• 8:30am: Empire Manufacturing, March, est. -10.5 (prior -16.64)
• 10:00am: NAHB Housing Market Index, March, est. 59 (prior 58)
• 10:00am: Business Inventories, Jan., est. 0% (prior 0.1%)
• 4:00pm: Total Net TIC Flows, Jan. (prior -$114b)
  • Net Long-term TIC Flows, Jan. (prior -$29.4b)

DB’s Jim Reid concludes the overnight wrap

So with the ECB ticked off, next on the central bank conveyor belt line was the BoJ this morning. Unlike what we saw from its European counterpart on Thursday, the BoJ has refrained from adding further stimulus this month. That means Japan’s new benchmark interest rate has been held at -0.1% and the annual purchases also maintained at ¥80tn a year. The decisions to hold fire on both were met with fairly convincing 7-2 and 8-1 respective majorities by BoJ board members. The bigger event now will be what Governor Kuroda chooses to say in his statement, the outcome of which we should know shortly.

Taking a look at the price action, an initial modest weakening in the Yen (touching 114.1) has given way to a decent bounce now, with the currency now +0.30% stronger on the day at 113.5. JGB yields are little changed relative to the moments prior to the decision, with the 10y currently up 2bps at -0.026%. The Nikkei is -0.89% and near its lows.

At this stage its worth putting some colour around the moves in Japanese assets since the BoJ cut rates into negative territory on January 29th. In that time (based on the intraday level just prior to the announcement and the current level this morning) the Nikkei is flat, while the Yen has strengthened over 4.5%, and 10y JGB’s are 24bps lower in yield (although have been more). In contrast, the S&P 500 and Stoxx 600 are +6.7% and +2.9% respectively, the USD index is -2%, the Euro -1.7% and 10y Treasury and Bund yields are unchanged and 12bps lower respectively. So clearly the effect has had a far greater impact on bond yields as opposed to Japanese equities, while the move for the Yen is perhaps the most curious of all.

Before we move on, a quick look at the rest of Asia this morning where it’s been a broadly weaker start on the whole. Along with those declines in Japan, the Hang Seng (-0.72%), Shanghai Comp (-1.13%), Kospi (-0.21%) and ASX (-1.30%) are all lower, while Aus and Asia credit indices are 5bps and 2bps wider respectively. Oil markets are off another percent or so which has helped US equity market futures turn negative this morning. Also of note this morning is news out of China where Bloomberg reports are suggesting that PBoC is in the process of drafting rules for a form of tax on FX transactions, in what’s said to be aimed at curbing currency speculation.

Moving on. Consolidation was the name of the game for markets yesterday and one which certainly reflected a ‘wait and see’ mode between the ECB and BoJ/Fed meetings. This was reflected by what was a fairly mundane session for US equity markets in particular where we saw the S&P 500 eventually close -0.13% (a rare decline this month) with the intraday high-to-low range a lowly 0.62% which is the smallest in 2016 so far. It’s amazing to see that the average range of the 49 trading days so far this year has been 1.73% and that 39 of those sessions have seen ranges of greater than 1%. Prior to this, European equities extended their gains with the Stoxx 600 closing +0.71%, although the post-ECB mammoth rally for European credit markets finally halted with iTraxx Main and Crossover closing 5bps and 9bps wider respectively. That said the indices are still 15bps and 47bps tighter than their pre-ECB levels. US credit also succumbed, with CDX IG over 2bps wider by the close of play.

With newsflow very light, it was Oil (a not too uncommon theme this year) which attracted the bulk of the headlines and ultimately dictated the price action for risk assets with WTI back below $38/bbl following a -3.43% decline yesterday. Much of this reflected stories emerging out of Iran with the country’s oil minister warning that the nation would not participate in an output freeze with other producers until they reached their production target of c.4m barrels a day, or roughly a third higher than current production levels. This follows the sanctions which were lifted on the country in January with the nation looking to ramp up output again to regain lost sales. Oil has risen nearly 50% from the intraday lows back in mid-February with the prospect of production freezes being a contributor in that rally. The WSJ touched on the possibility of these latest comments raising the risks that other countries involved in these talks (namely Saudi Arabia, Venezuela and Russia) may not follow through given the participation is contingent on Iran cooperating, however comments from Russia’s oil minister last night suggesting that Iran ‘may join us in the freeze with time’ and that ‘this is a normal, constructive position’ for them should abate major concerns for now.

One of the other interesting snippets from yesterday came from the European financials market and specifically UBS with the news that the Bank has issued Europe’s first coco bond since the huge sell-off which swept through the asset class in January. According to Bloomberg, the $1.5bn AT1 deal was said to have attracted $8bn of orders, with pricing also coming in tighter than the initial talk. Further evidence of the remarkable swing in sentiment that we’ve seen in the last six weeks or so.

Away from this there was little else to report yesterday. The only data of note was a robust industrial production print for the Euro area which bettered expectations at +2.1% mom (vs. +1.7% expected) in January which was the best monthly performance since 2009, with the data also helping support growth expectations for Europe. Meanwhile the ECB’s Villeroy spoke mid-morning and made mention to the need for the ECB to continue to adhere to its inflation mandate, highlighting the need for the target being essential for the ‘credibility of monetary policy’. Villeroy also noted that expanding purchases to corporate bonds is ‘a very significant signal for the real economy’.

Looking at the day ahead now, kicking off proceedings this morning will be France where we’ll receive the final revision to the February inflation report, followed later on by the Q4 employment report for the Euro area. This afternoon in the US is set to be a bumper session. The February retail sales report looks set to be the highlight where market expectations are for a -0.2% mom decline in the headline and +0.2% mom gain in the core and control group components. Also out today will be the NY Fed empire survey which is expected to remain consistent with the weakness in the manufacturing sector. The February PPI report will also be important and it’s worth keeping an eye on the healthcare subcomponent given it is used in the core PCE deflator. Also due out will be January business inventories and the March NAHB housing market index print. Away from this, tonight will see five more primaries in the US President race

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