With little newsflow out of Europe, and just as little on deck out of the US (just NY ISM and auto sales later today), the main overnight events were out of Asia where first the RBA decided to leave rates unchanged (despite the majority calling for a rate cut) when as Bloomberg's Richard Breslow noted, in the RBA communique the central bank “changed their reference to China from “China's growth was in line with expectations” to “China's growth will slow a little from last year's outcome.” Whatever may be happening with China, one thing is clear – either the RBA announcement was leaked a minute early, or HFT algos took a huge gamble and soared higher up to a minute earlier (more shortly).
Speaking of China, the rate-cut euphoria lasted just one day, and after a feeble 0.8% bounce on Monday, the SHCOMP was down 2.2% this morning over fears the PBOC is doing too little, too late to halt what is now perceived by many as a massive “tightening” capital flight out of China. Finally, Japan made the newsflow, after it JGBs continued to slide following a weak auction, fears that the BOJ is done easing after Abe advisor Etsuro Honda warned against overheating, and after the biggest jump in base pay in over a decade led some to think the BOJ may soon have to halt easing altogether, especially if real wages proceed to rise.
Another notable development is the ongoing weakness in US rates even as the ECB-buying backstop has made selling of rates in Europe virtually illegal. The weakness in the US 10Y however can be almost entirely attributed to the “mammoth” Actavis-Allergan issue, which is now said to be more than 4x oversubscribed, with nearly $90 billion in orders for just over $20 billion in paper. The result is weakness for matched Treasurys due to rate locks: as InTouch David Fuller's writes watch for “late rate lock unwinds into/out of pricing” though it depends on how big rate lock was Feb. 26 and “whether end-users buy it outright or vs USTs.” Once this latest mega issue is absorbed expect the convergence trade to resume.
Wrapping up the key moves, the dollar index rose modestly to 95.53 this morning, hitting the highest since 2003, as further easing pressure builds on banks around the world as the US marches along to what is seen by many as a de minimis rate hike come hell, high water, or any economic data whatsoever.
European equities currently reside in modest positive territory in what has been yet another session so far which has been relatively void of pertinent newsflow from the Eurozone. On a sector specific basis, financial names have been placed under some minor pressure in the wake of Barclay's (-2.8%) pre-market report whereby the Co. increased their provisions for the FX probe by GBP 500mln and said they could not be certain over whether they would need to set aside further provisions. From a fixed income perspective, Bunds initially saw a subdued first half of the session in tandem with the rangebound performance seen across European equities with participants still monitoring the ongoing negotiations between Greece and their Eurozone counterparts with European Commission President Juncker suggesting that a third bailout for Greece has not been discussed. Heading into the North American crossover, Bunds and USTs saw a modest downtick with volumes in the Bund rolling from the March contract to June, while Finland has also opened books on its EUR 3bln 2031 offering. Additionally, Actavis' mammoth nine-part offering is expected to be priced today, with the size of the issuance expected to be in excess of USD 22bln. Note, this placed downward pressure on USTs heading into the close yesterday.
In FX markets, AUD has managed to hold onto its gains seen overnight after the RBA unexpectedly left its Cash Rate Target steady at 2.25%. Nonetheless, the central bank also signalled further easing by saying it may be appropriate over the period ahead, which capped further AUD gains. Elsewhere, USD-index has recovered off its worst levels amid no fundamental news, although USD/JPY remains in negative territory following comments from Japanese PM Advisor Honda who also said current USD/JPY levels are a kind of an upper limit in the exchange rate's comfort zone. GBP was granted a brief spell of reprieve following the latest UK construction PMI reading which exceeded expectations (60.1 vs. Exp. 59.1), however, GBP remains relatively unchanged against the Greenback.
