The best summary of the morning after the Fed’s official end of QE3 comes from DB’s Jim Reid, and is as follows: “The surprises from last night’s FOMC statement was not that the Fed wants to be more hawkish than the market currently prices in and that its wants to raise rates in 2015, but that they chose to be so confident so soon after the recent volatility. Last night’s statement would have been near impossible to publish two weeks ago so it is a bit of a risk. However as ever the Fed is data dependant and therefore what they say they are going to likely do at some point in the future might prove to be largely irrelevant when the time comes. As a minimum the Fed seem quite comfortable withdrawing liquidity from the market and with that we continue to think that bouts of volatility are more likely now than they were for most of the two years that QE3 was in existence. A lot now depends on the ECB and maybe the BoJ picking up the liquidity baton. We may not have to wait too long to find out about their future direction as the BoJ have an interesting meeting tomorrow and the ECB one this time next week.“
Indeed, the Fed’s hawkishness and the resultant dollar strength are already having an impact on global fixed income markets, as both Japan and Denmark sold Bills at negative yields for the first time. Not only that, but despite another day of endless Japan jawboning which perhaps sought to extend the JPY losses above 109, the USDJPY reverted back to its 109 tractor, a level which it may find far too high as increasingly more Japanese businesses are going bankrupt fighting the weak (gasp) currency. And then there was the Bank of Russia which is rumored to be intervening in the market ahead of its key rate decision tomorrow when it is expected to lower rates by 50 bps to 8.00%, the result being the biggest Ruble surge since January 2010, rising by over 2.8%. What can one say: it is a central bank world after all.
But more to the point, after a relatively tame reaction yesterday in the aftermath of the Fed statement, there has been a sudden and sharp bout of risk-offness around the globe, with Eurostoxx finding an air pocket, following German deflation data which was negative across the board and another day of broad weakness surrounding Italian banks in the aftermath of the “successful” stress test. Perhaps most surprising is the speed with which the session, which was until just an hour ago looking at an unchanged open, turned sharply red, suggesting that while volumes continue to be low, liquidity is near record lows.
So despite opening in the green following a batch of strong earnings reports, European equities trade firmly in the red (Eurostoxx -0.9%) with the DAX slipping below 9000 and Eurostoxx below 3000. This comes as attention resides with the lacklustre German CPI releases with most of the regional results slipping into negative territory around the 0.2-0.3% level. Furthermore, sentiment has also been buoyed in a continuation of the response to the hawkish Fed release yesterday and comments from the EBA chief who said banks should not feel too secure after ECB stress tests, even those banks who passed them. As such financials (particularly in the periphery) are being squeezed lower, with basic materials names are also notably lower, given the broadly stronger USD which was weighed on the commodity complex. US equity futures, which had flirted with the unchanged line for most of the session, just dropped in sympathy to overnight lows.
Elsewhere, Greek bank stocks are down 5%-9% with the GE/GR 10yr government bond yield spread seen wider by 60bps on the session, as the country continues to face a “climate of uncertainty” until February, amid snap election risk, according to the administrative reform minister Mitsotakis. Elsewhere, fixed income markets have been provided some reprieve alongside the slide lower in equities, with the Bund currently residing just shy of yesterday’s highs at 150.66.
To summarize (even though with liquidity as non-existant as it is, this may be completely stale by the time we go to print in a minute or so), European shares erase gains, fall close to intraday lows following the Fed’s decision to end QE. Banks, basic resources sectors underperform, while health care, tech outperform. Companies including Shell, Barclays, Aviva, Volkswagen, Alcatel-Lucent, ASMI, Bayer released earnings. German unemployment unexpectedly declines. The Italian and U.K. markets are the worst-performing larger bourses, the Swiss the best. The euro is weaker against the dollar. Greek 10yr bond yields rise; German yields decline. Commodities decline, with nickel, silver underperforming and wheat outperforming. U.S. jobless claims, GDP, personal consumption, core PCE due later.
