Following yesterday’s OPEC “production freeze” meeting in Doha which ended in total failure, where in a seemingly last minute change of heart Saudi Arabia and specifically its deputy crown prince bin Salman revised the terms of the agreement demanding Iran participate in the freeze after all knowing well it won’t, oil crashed and with it so did the strategy of jawboning for the past 2 months had been exposed for what it was: a desperate attempt to keep oil prices stable and “crush shorts” while global demand slowly picked up.
As a result what followed was crude’s biggest drop in months, a plunge of some 7% in the early Sunday trading hours, which also dragged down US equity markets and currencies of commodity-exporting nations. Furthermore, as can be seen in the chart below, with oil the most important commodity for global stock prices, many wondered if central banks would allow this drop to persist: after all by now everyone knows central banks’ only mandate is keeping asset prices propped up.
And whether it was central banks, or chronic BTFDers, just 12 hours after oil opened for trading with a loud crash, the commodity has nearly wiped out all losses, and both brent and WTI were down barely 2%, leading to both European stocks and US equity futures virtually unchanged on the session. Most of the losses were wiped out just after the European open, with WTI Jun’16 futures breaking back above USD 40/bbl to take out USD 40.50/bbl to the upside in the process. Almost as if the market was waiting for the ECB to start buying.
The Stoxx Europe 600 Index was little changed, after earlier sliding 1.4 percent, and U.S. equity-index futures also pared declines.
Whether oil’s dramatic overnight reversal will persist, however, remains to be seen: we expect OPEC nations will desperately try to figure out what the proper “jawboning” headline is to launch algo buying programs, now that “Doha freeze” has been exhausted. One early candidate has emerged:
- RUSSIA TO HOLD TALKS W/ SAUDIS ON OIL OUTPUT FREEZE:RIA
Then again, Iran once again refuses to comply, and with good reason – it is right to demand to be able to produce as much as it did before the US sanctions.
- IRAN ISN’T RESPONSIBLE FOR OIL OVERSUPPLY: ZANGANEH ON RADIO
So for now, all eyes are on oil.
“Oil is the most dominant theme today,” said Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt. “It is a relatively clear pattern of commodity currencies being under pressure. On the other hand there is general risk aversion on the rise, which is supporting safe-haven currencies like the yen.”
One catalyst that is helping prop up oil prices is Kuwait whose crude production tumbled by 60% to 1.1 million barrels a day and its refineries scaled back operations as the state oil company took emergency measures Sunday to cope with the first day of an open-ended labor strike. Kuwait produced 2.81 million barrels a day last month, making it OPEC’s fourth-largest member.
In the other top story overnight, lawmakers in Brazil’s lower house of Congress reached the threshold of 342 votes needed to advance the motion to impeach Rousseff to the Senate on Sunday.
Morgan Stanley, is among companies reporting earnings on Monday after financial firms led stocks higher last week, with JPMorgan Chase & Co. and Bank of America Corp. climbing after announcing reductions in first-quarter expenses that beat analysts’ estimates. International Business Machines Corp. and Netflix Inc. are also due to release results.
This is where the markets stand now:
- S&P 500 futures down 0.2% to 2071
- Stoxx 600 down 0.2% to 342
- FTSE 100 down 0.2% to 6329
- DAX down 0.3% to 10024
- German 10Yr yield up less than 1bp to 0.13%
- Italian 10Yr yield down less than 1bp to 1.33%
- Spanish 10Yr yield up less than 1bp to 1.5%
- S&P GSCI Index down 1.2% to 332.3
- MSCI Asia Pacific down 1.5% to 130
- Nikkei 225 down 3.4% to 16276
- Hang Seng down 0.7% to 21162
- Shanghai Composite down 1.4% to 3034
- S&P/ASX 200 down 0.4% to 5137
- US 10-yr yield down 2bps to 1.74%
- Dollar Index down 0.1% to 94.6
- WTI Crude futures down 3% to $39.14
- Brent Futures down 2.4% to $42.07
- Gold spot up 0.1% to $1,235
- Silver spot down 0.3% to $16.19
Global Top News
- Oil Plunges After Output Talks Fail Amid Saudi Demands Over Iran: no Doha deal as Saudi insists all OPEC members must join
- Verizon Said to Lead Bids for Yahoo, Wall Street Journal Reports: Time Inc., Alphabet, IAC/InterActiveCorp dropped out
- McGraw Hill Sells J.D. Power Unit to XIO Group for $1.1 Billion: sale expected to close in third quarter
- Rousseff Hangs by a Thread After Losing Impeachment Vote: Rousseff open to dialogue, but not demoralized by vote
- Japanese Stocks Tumble After Oil Talks Deadlock as Yen Advances: insurers, Sony, Toyota drop in wake of deadly earthquake
- Amazon Rivals Netflix With Stand-Alone Video Subscriptions: Amazon Prime will be available on monthly payment plan of $10.99
- Disney’s on a roll as ‘Jungle Book’ Opens at $103.6 Million: debut was third-biggest so far this year, ComScore says
- Autohome Gets Takeover Bid From CEO’s Group, Topping Ping An: takeover proposal follows Ping An offer to buy Telstra’s stake
Looking at regional markets, Asian equities began the week on the back-foot, as oil prices slumped after output freeze talks in Doha failed. Nikkei 225 (-3.4%) underperformed in the aftermath of another earthquake over the weekend which has resulted in losses in insurers and has disrupted several large manufacturers’ operations, while a firmer JPY also added to the tone. ASX 200 (-0.4%) was led lower by energy names following the failure to strike an output freeze deal as Saudi demanded that Iran be included in an agreement, while Iran had shunned the meeting. Shanghai Comp (-1.4%) also conformed to the risk-averse tone despite continued improvement in home prices (Y/Y +4.9% vs. Prey. 3.6%), as the rampant property sector could also encourage inflows from stocks. 10yr JGBs traded marginally higher amid the risk-averse tone and the BoJ in the market for JPY 450b1n 5-10yr JGBs, which 20yr also yields decline to fresh record lows.
Asian top news:
- China Home-Price Gains Spread as Easing Measures Spur Demand: New-home prices climbed in 62 cities in March, 47 in Feb.
- Credit Suisse to Halt Earnings Previews in Japan Following Probe: Firm won’t allow analysts to visit cos. to gather information before they report earnings,
- High-Frequency Trading Chief Lashes Out at Proposed India Probe: Panel advising India’s regulator recommended investigation
- Alipay Owner Said to Start Shanghai IPO Process as Soon as 2016: Alibaba affiliate said to meet need for 3-years of profit
- CIMB’s Nazir Takes Leave Amid Audit of Political Fund Transfers: Bank chairman helped distribute funds to politicians in 2013
- Quake Death Toll Rises in Japan as Economic Impact Spreads: Toyota said oper. profit may drop as supplies disrupted
- Siliconware Says Tsinghua Unigroup Deal on Hold: possibility of investment depends on interaction between China, Taiwan govts
European stocks began the week under pressure, weighed on by energy names in the wake of the failed Doha meeting. Although equities later pared the majority of their opening losses, given that expectations of a significant deal coming to fruition had been somewhat small. Elsewhere, Italian banks are lower across the board this morning as doubts continue to mount over whether the new bank bailout fund has the means to revive the sector with some of the funds with investors themselves cynical about its prospects
The risk averse sentiment across Europe has sparked flight-to-quality flow into fixed income markets with Bunds remaining in close proximity to 164.00. However, German paper pulled back from their highs by mid-morning amid the turnaround in equities, allied with another heavy bout of supply this week, with an estimated EUR 20bIn worth of issuance.
European top news:
- Draghi Seen Putting ECB Stimulus Back on Agenda After Summer: analysts say ECB could add asset purchases or cut rates again
- Osborne Warns of Decades of Economic Pain If U.K. Quits EU: Brexit would knock 6% off U.K. GDP by 2030, Treasury argues
- World’s Biggest Miner Says Brexit Would Harm China View of U.K.: Obama to say Britain should stay in EU in London this week
- CaixaBank Bids EU908m for Rest of Banco BPI: offer is subject to scrapping a voting-rights limit at BPI
- Immofinanz Buying 26% of CA Immo in First Step to Merger: companies revisit last year’s hostile battle on friendly terms
- Banker Unrest Threatens Credit Suisse, Deutsche Bank Turnarounds: CEOs Thiam, Cryan face rising discontent
- Hutchison U.K. Mobile Deal Said to Face EU Veto Within Weeks: EU block may halt wave of recent telecoms consolidation
In FX, today has seen a morning of consolidation in the FX markets, with USD/CAD buying seen as the obvious trade in the wake of the collapsed talks in Doha. Given the signals given ahead of the meeting, the Saudi objection to Iran’s omission to an agreement was the clear writing to the wall, so the dip in Oil has been corrected accordingly leading the CAD off its lows. We gapped up to 1.2950 in the spot rate, and after rejecting a move on 1.3000, we have since moved back under 1.2900 to suggest a gap readjustment. AUD and NZD saw similar moves in line with CAD, but we have seen .7700 and .6900 levels reclaimed, but the recent highs look a stretch as yet. The USD index is threatening lower though, so expect a further extension (higher) in the commodity linked currencies, with the EUR and GBP also better bid as a result. USD/JPY is caught in the crossfire, but after more earthquakes in Japan, the pair has been pressured to sub 108.00 again, though briefly so as yet with a modest recovery in the Euro bourses aiding the upturn to just shy of 108.50.
The story of the overnight session so far has been that of commodities and specifically oil, after OPEC and Non-OPEC producers failed to agree to an output freeze deal as Saudi demanded that Iran be part of an agreement and Iran refused to attend the meeting in Doha. (Telegraph) There were comments from several oil ministers including Qatar’s who stated that OPEC needed more time. Furthermore, Russia’s oil minister said that Iran was not the reason behind the breakdown in talks and that the door is not shut for a production freeze, while Nigeria’s oil minister suggested that OPEC should shift to a majority vote system.
The energy complex saw initial downside today after the failed Doha talks, however much of the losses have been paired during the European morning, with WTI Jun’16 futures breaking back above USD 40/bbl to take out USD 40.50/bbl to the upside in the process. In terms of the metals complex, gold prices saw mild support amid risk-averse sentiment, although subdued price action during European hours, while overnight iron ore prices coat-tailed on steel advances which were underpinned by seasonal demand.
Bulletin Headline Summary from RanSquawl and Bloomberg
- The OPEC/non-OPEC talks in Doha over the weekend failed to lead to an agreement, with the fallout seeing downside in oil, and softness in commodity-linked currencies and energy names.
- Much of the immediate fallout from Doha saw a paring during European hours, with many suggesting that chances of a significant deal coming to fruition had been somewhat small.
- Today’s economic calendar is light in data and will see focus fall on potential comments from Fed’s Rosengren, Dudley and Kashkari.
Treasuries little changed in overnight trading even as oil drops below $40/barrel after producers ended talks in Doha without any agreement on limiting supplies; global equity markets drop, gold rises.
Dilma Rousseff’s presidency is hanging by a thread after Brazil’s lower house of Congress voted in favor of her impeachment, a decision that’s likely to cheer investors
As Europe holds its breath over whether or not the U.K. will stay in the union, companies are holding on to their cash. Coming off of an eight-year record for mergers and acquisitions, the U.K. just had its worst quarter for deals since 2010
Leaving the European Union would deliver a blow to Britain’s economy and leave it 6% smaller by 2030, according to a Treasury analysis produced as the government attempts to dissuade the electorate from voting to quit the bloc
Germany’s Finance Minister Schaeuble tells U.K. counterpart George Osborne that Berlin would be tough negotiator on trade agreement if U.K. leaves EU, Financial Times reports
Next ECB head should be from Germany as Mario Draghi’s policies “don’t help anymore,” Markus Soeder, Bavarian finance minister, says in interview with Bild am Sonntag
Something is going on below the surface of earnings that should give bulls pause; quarterly forecasts for the Standard & Poor’s 500 Index show profits are declining at the steepest rate since the financial crisis relative to revenue
China’s home-price gains accelerated last month as the nation’s economic hubs such as Beijing, Shanghai and Shenzhen continued to lead the way amid surging liquidity that underpinned demand
Sovereign 10Y bond yields mixed; European, Asian equity markets lower; U.S. equity-index futures drop. WTI crude oil and copper drop, gold rises
US Event Calendar
- 8:30am: Fed’s Dudley speaks in New York
- 10am: NAHB Housing Market Index, April, est. 59 (prior 58)
- 12:30pm: Fed’s Kashkari speaks in Minneapolis
- 7:00pm: Fed’s Rosengren speaks in New Britain, Conn.
DB’s Jim Reid concludes the overnight wrap
All eyes on oil this morning as the long awaited producers meeting in Doha ended in disappointment last night. Following extended talks, OPEC members and major producers walked away without any agreement on a production freeze. Prior to this, the WSJ had suggested that a draft accord had been circulated calling for a freeze at January levels until the end of October. Saudi Arabia seems to have taken a harder stance however with the major sticking point the lack of participation from Iran, who failed to even send a representative to the meeting. Following the end of the meeting, the energy minister of Qatar was however cited as saying that OPEC members will continue to consult between themselves as well as non-OPEC members up until June with the bi-annual OPEC meeting set to be held on June 2nd.
The immediate reaction when markets opened this morning was for WTI to plunge over 7% and touch a low of $37.61/bbl (after closing at $40.36/bbl on Friday). Oil has since pared part of those heavy losses and is currently hovering just shy of $38.50/bbl (still nearly -5% on the day). The losses have dragged bourses in Asia lower. The Nikkei (-3.08%) is leading the way, not helped by a near +1% safe haven rally for the Yen. Elsewhere the Shanghai Comp is -1.31%, while the Hang Seng (-1.20%), ASX (-0.22%) and Kospi (-0.48%) are all in the red. Commodity sensitive currencies are up to a percent down this morning, while credit markets are unsurprisingly a couple of basis points wider. US equity index futures are also in the red to the tune of half a percent or so.
Meanwhile, the news of the lack of an agreement at yesterday’s meeting is interestingly also coinciding with the news of a forced production cut from Kuwait following a public sector strike which started on Sunday. The Kuwait Oil Company announced in a statement that the OPEC member is to slash production from the usual 3million barrels a day, to just 1.1million barrels a day. Public sector workers are protesting on the back of plans to make cuts to wages and incentives, with the FT reporting that unions had called for the reforms to be cancelled prior to commencing yesterday’s strike. It’s hard to know if this is helping to support a floor on the drop in the Oil price this morning, and ultimately how long this strike will go on for and therefore the overall importance of it, but it’ll be worth keeping an eye on how things progress.
Elsewhere, the other headline grabber this morning is the latest political update out of Brazil where the key lower house vote has happened overnight. Crucially, Congress have voted in favour of President Rousseff’s impeachment, reaching the required threshold of 342 votes. That clears the way for the motion to be passed over to the Senate where it will go in front of a special committee where a simple majority vote (from 81 members) will be taken. Should that majority be reached, then an official impeachment trial is launched, with Rousseff subsequently temporarily removed from office during the trial and Vice-President Temer stepping in.
Moving on to this week now. Although we’ll fully preview it at the end the highlights are tomorrow’s ECB lending survey, the ECB meeting on Thursday, the global flash PMI numbers on Friday and from earnings season as 104 S&P 500 companies and 46 Eurostoxx firms report this week including the remaining banks and also some of the big bellwether tech names. It’ll also be worth keeping a final eye on the Fedspeak tonight (particularly Dudley given his views have been closely aligned with Yellen) with the blackout period kicking in thereafter ahead of the April 26th and 27th FOMC meeting.
With regards to the ECB, their lending survey may offer clues about how Q1 volatility and especially the poor equity performance of banks has impacted lending if at all. Lending rates fell in February and net new lending was positive and while it might still be too early to tell it’s an important release all the same and due out at 9am BST tomorrow.
With regards to their meeting on Thursday, the main focus will likely be on any additional info they can give on their upcoming corporate bond purchasing scheme. They are sure to be asked for more details so it’ll be interesting if they have any. On this topic Michal Jezek in my team has just published a report “How Might Default Risk Shape the ECB Corporate Bond Purchase”. In the report, we explain why we believe the size of the ECB’s corporate bond purchase programme should not be constrained by concerns about default losses, at least not anywhere near current spread levels. We therefore expect the ECB to move all the way down to BBBs rather than keep the programme smaller and stick to higher-rated bonds. However, diversification is a key default-risk-management tool. We estimate that if the ECB aimed to passively buy a slice of the relevant market portfolio but self-imposed a 2% cap on single-issuer exposures, the effective eligible universe would shrink by 12%. With a 1% cap, it would shrink by 38% to about €350bn. Still, we think that even with such a diversification restriction the ECB should be able to build up a portfolio in line with our baseline expectation of monthly purchases averaging €3-5bn, presumably including the primary market. We also think that as long as the ECB can take a portfolio view on default losses, it would make little sense to automatically sell fallen angel corporate debt.
Moving on. Aside from the Doha events, the only other snippet of news from the weekend came from the IMF’s spring meetings, although in truth not much new material appears to have come out of these. IMF Chief Lagarde summed up the mood from officials as having an overall lower level of anxiety relative to their last meeting, with officials demonstrating ‘a collective endeavour to indentify the solution and the responses to the global economic situation’. Some of the talks also focused on FX policy with members reiterating that they would ‘reaffirm previous exchange-rate commitments, including that we will refrain from competitive devaluations’.
A quick recap of how we closed out last week on Friday. Risk assets finished on a bit of a whimper with much of that being attributed to heavy losses in the energy sector as Oil prices moved steadily lower with expectations declining (now justified) ahead of Doha. Some soft US data didn’t help (more on that shortly) while Citigroup became the latest bank to report earnings in the sector. A beat at both the earnings and top line were recorded with the theme being similar to what we’ve seen insofar with much of that profit beat being cost cut driven. The S&P 500 eventually closed with a modest -0.10% loss although the five-day return was still a healthy +1.62%. US credit indices were a smidgen wider while in Europe it was credit which was the relative underperformer on Friday, the iTraxx Crossover in particular ending 10bps wider while the Stoxx 600 closed -0.35% for its first negative day in over a week.
With regards to that data out of the US on Friday, most notable early on was the steeper than expected fall in industrial production last month (-0.6% mom vs. -0.1% expected), the second consecutive monthly decline of that magnitude with the mining and utility sectors leading much of the softness. Manufacturing production (-0.3% mom vs. +0.1% expected) was also down. That said the first factory reading for April was supportive. The NY Fed’s empire manufacturing survey revealed a near 9pt rise to 9.6 (vs. 2.0 expected) and the highest level for that series since January 2015 with new orders, employment and prices paid all strengthening. Elsewhere, the first release of the April University of Michigan consumer sentiment reading revealed an unexpected 1.3pt fall in the index to 89.7 (vs. 92.0 expected) with the expectations component leading much of that. One year inflation expectations were unchanged at 2.7% however it was noted that 5-10y expectations tumbled two-tenths to 2.5%.
Staying in the US, Chicago Fed President Evans was also out with comments on Friday, saying (unsurprisingly) that there is a ‘high hurdle’ for any tightening in policy from the Fed next week. A lot of Evans’ comments were focused on the inflation picture however which he highlighted as informing the Fed’s decisions in the near term.
With the Fed meeting next week, there’s little in the way of Fedspeak although today we will hear Dudley give opening remarks at a conference this afternoon, followed by Kashkari and Rosengren later this evening. The BoE’s Carney is due to speak in Parliament tomorrow afternoon, while on the US election front we’ll get the NY primary tomorrow.
Earnings season ramps up too and we’ll see 104 S&P 500 companies report. The highlights are the tech names and we’ll get reports from IBM and Netflix today, Yahoo and Intel tomorrow followed by Alphabet, Microsoft and Verizon on Thursday. Away from the tech names we’ll also hear from Pepsico (today), Morgan Stanley (today), Goldman Sachs (Tuesday), Johnson & Johnson (Tuesday), Coca-Cola (Wednesday), General Motors (Thursday), Schlumberger (Thursday), Caterpillar (Friday), General Electric (Friday) and McDonalds (Friday). Meanwhile in Europe we’ll get the latest earnings reports from 46 Eurostoxx companies.
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