Equity Levitation Stumbles After Second ECB Denial Of Corporate Bond Buying

A day after a Reuters headline blast proclaimed that, in a stunning turn of events, the ECB, which has barely started buying covered bonds (of countries like Germany today for example, because the record low yielding Bunds clearly need help from the ECB) will also buy corporate bonds, sending the stock market soaring the most in 2014, it has now backtracked for the second time. Following a report from the FT yesterday which denied the report, the second denial came straight from Reuters itself which hours ago said that the ECB "has no concrete plans to buy corporate bonds, but this could be a way to prevent the bank from paying too much for just covered bonds and asset backed securities, ECB governing council member Luc Coene told Belgian media."

"We still haven't had a serious discussion about the purchase of corporate bonds," Coene, who is governor of the Belgian central bank, told business dailies L'Echo and De Tijd. "If we limit ourselves to buying covered bonds and asset backed securities there is a risk that we would pay too high a price. We can prevent that by also buying corporate bonds," Coene added. "But there is no concrete proposal for that on the table."

And if and when the ECB ever begins buying corporate bonds (of which there is, once again, not enough to boost its balance sheet to the required size, but more on that later), the ECB can just jawbone that in order to not overpay for bonds, corporate or otherwise, it will just begin buying equities, and so on until the ECB has "no choice" but to monetize the garbage in your trash so as not to overpay for your kitchen sink.

However, if the ultimate goal of yesterday's leak was to push the EUR lower (and stocks higher of course), then the reason why today's second rejection did little to rebound the Euro is because once again, just after Europe's open, Spanish Efe newswire reported that 11 banks from 6 European countries had failed the ECB stress test. Specifically, Efe said Erste, along with banks from Italy, Belgium, Cyprus, Portugal and Greece, had failed the ECB review based on preliminary data, but gave no details of the size of the capital holes at the banks.

The ECB, which likely once again leaked the news, said it could not comment on individual institutions or on speculation. "Any inferences drawn as to the final outcome of the exercise would be highly speculative until the results are final on 26 October," said a spokesman. What the ECB certainly did enjoy is that once again, with just one media leak, it had managed to bring down the EURUSD by 50 pips, pushing it under 1.27 yet again. We wonder how long until Europe discovers, just like Japan, that merely slamming your currency does little to boost exports. But at least there is a rising market to keep everyone happy so why not.

Finally, circling back to those German record low yields, earlier today Germany sold another €1.428 billion in 30 year paper at a record low yield of 1.77%, far below the 2.25% in the last such auction in May. However, this was also the 10th (!) un-covered (as in failed) German auction of the year with the Buba forced to retain a whopping 28% of the paper, compared to 19% at the last primary issuance.

Elsewhere, the BoE’s October minutes showed a 7-2 split among MPC members with Weale and McCafferty maintaining their hawkish stance, despite speculation that circulated pre-release that McCafferty may have stepped down in his call to hike rates. The initially reaction was volatile as outside bets of a 8-1 split were unwound; however, the details revealed a decidedly more dovish outlook from the majority of members who noted some signs that UK economic was losing momentum and that the economic outlook had worsened. As such the short sterling curve has flattened aggressively. Prelim Barclays month end extension for US treasuries +0.08yrs.

In summary, European equities initially opened higher this morning following a 3rd consecutive day of >1% gains in the S&P 500 for the first time in 3 years, and with the Nikkei up some 2.6% overnight. However the positive sentiment proved short-lived as weak corporate earnings out of BAT and Heineken weighed on consumer staples; ECB’s Coene said that there is no concrete proposal for bond buying, refuting claims to the contrary yesterday; and Spanish press reported that 11 banks may fail the ECB stress tests which are due to be released this Sunday (ECB has declined to comment).

Looking ahead, attention turns to US CPI (Sep), DoE oil inventories, Boeing (BA) earnings, and the release of the Bank of Canada interest rate decision where all surveyed analysts are expecting rates to remain on hold at 1%

Bulletin headline summary from RanSquawk and Bloomberg

Reports circulate that 11 banks may have failed the ECB’s stress tests which are due to be released on Sunday
GBP underperforms in the FX market after dovish comments in the October BoE minutes
Treasuries gain before CPI report amid weakness in European stocks, decline in U.S. equity index futures as market looks to next week’s Fed meeting.
Fed isn’t likely to postpone end of QE or initiate more asset buying soon despite global risks and weakening inflation momentum, according to some strategists
ECB’s Luc Coene said while policy makers could embark on further stimulus after purchasing covered bonds for the past two days, there’s no specific plan to buy corporate bonds
Bank of England officials split for a third month on whether to increase the key interest rate as a majority saw increased risks from a slump in the euro-area economy
ECB bought Spanish covered bonds in the third day of its purchase program, according to a person familiar with the matter, who asked not to be identified because they’re not authorized to speak about it
Johnson & Johnson (JNJ) plans to have 250,000 doses of an experimental Ebola vaccine ready for use in clinical trials in May, adding to efforts to protect people from the virus that has killed thousands of people in West AfricaJNJ
Iraqi Kurdish fighters are set to reinforce the defense of Kobani, the Syrian town besieged by Islamic State, after Turkey agreed to let them transit its territory
China’s media is ratcheting up the rhetoric against Hong Kong’s pro-democracy movement, saying protesters risk becoming foreign puppets
Russia and Ukraine will seek a temporary deal next week to resolve a natural gas pricing dispute after failing to agree on future payments in talks brokered by the EU
Sovereign yields mostly lower, Greek 10Y -46bps to 7.25%. Asian stocks gain, European stocks mixed, U.S. equity-index futures decline. Brent crude and copper gain, gold falls

US Event Calendar

7:00am: MBA Mortgage Applications, Oct. 17 (prior 5.6%)
8:30am: CPI m/m, Sept., est. 0.0% (prior -0.2%)
- CPI y/y, Sept., est. 1.6% (prior 1.7%)
- CPI Index NSA, Sept., est. 238.030 (prior 237.852)
- CPI Ex-Food and Energy m/m, Sept., est. 0.1% (prior 0.0%)
- CPI Ex-Food and Energy y/y, Sept., est. 1.7% (prior 1.7%)
- CPI Core Index SA, Sept., est. 238.625 (prior 238.345)

Central Banks

10:00am: Bank of Canada seen maintaining benchmark interest rate of 1%
11:15am: Bank of Canada’s Poloz and Wilkins hold news conference in Ottawa
5:00pm: Reserve Bank of Australia’s Stevens speaks in Sydney

GBP is the main underperformer in the FX market weighed by a dovish interpretation of the October BoE minutes which although showing a consistent 7-2 split, saw the majority of MPC members continue to fret over the fragility of the economic environment. Meanwhile, EUR has also weakened amid reports that 11 banks may well have failed ECB’s stress tests which are due to be unveiled this Sunday. A combination of the above has prompted a flight to quality into the USD, with the DXY seen up 0.17%.

According to government sources, the PBOC is likely to hold its line against an interest rate cut even as growth slows to a quarter-century trough, as the politics of reform influence the conduct of monetary policy. (RTRS)

COMMODITIES

WTI crude futures remain flat into the US session as participants await the release of the DoE oil inventory data later today. The headline crude number is expected to show a build of 3mln compared to last week’s build of 8.923mln. To recap, yesterday’s headline API number showed a lower than previous build (1200k vs. Prev. 10200k).

Asian Market Wrap

Equity benchmarks are feeding off the positive sentiment with the Japanese, Hong Kong and Korean gauges all trading notably stronger – as we type the Nikkei is up +1.7% whilst the Hang Seng is trading +1.3% higher. Chinese equities are trading modestly firmer following the GDP print yesterday whilst elsewhere, in a boost to the Japanese manufacturing sector the nation’s exports rose at a greater than expected 6.9% YoY, providing a much needed vote of confidence to the central bank. Meanwhile in Australia the core CPI print was a touch softer than market expectations at 0.4% QoQ which we deem as unlikely to shift the RBA’s stance on monetary policy in the near term.

Europe Market Wrap

European shares little changed, having risen from earlier lows, with the personal & household and basic resources sectors underperforming and financial services, insurance outperforming. Companies including ABB, Heineken, Husqvarna, BATS, Nordea and Iberdrola released results. The U.K. and Spanish markets are the worst-performing larger bourses, the Swiss the best. The euro is weaker against the dollar. Greek 10yr bond yields fall; Portuguese yields decline. Commodities gain, with silver, corn underperforming and zinc outperforming. U.S. mortgage applications, CPI due later.