Archive - Sep 30, 2013

Across asset classes, BofAML warns that financial markets suggest that this week will see a continuation of the risk off theme from last week. The breakout in the VIX says that investor anxiety wiil remain elevated, particularly as the S&P500 remains on track to test 10 month trendline support at 1657. In such an environment, safe havens such as US Treasuries should benefit with a target 2.544%/2.459% resistance.

In the upcoming week markets will continue to focus on these fiscal issues in the US, now that a temporary Government shutdown past Tuesday is assured. Still on the fiscal side but outside the US, look forward to Prime Minister Abe announcing his final decision on the VAT hike as well as unveiling a widely anticipated economic stimulus package. Finally, fiscal policy also played a role in the Italian political instability with four ministers resigning from the coalition Government. The backdrop to these events is a rapid deterioration of the political climate after former PM Berlusconi was convicted of tax evasion by a High Court.

• Government Heads Toward Shutdown (WSJ), First U.S. Shutdown in 17 Years at Midnight Seen Probable (BBG), Congress in game of chicken (RTRS)
• Italian Premier Pursues Last-Ditch Rescue of Government (WSJ)
• Election risk rattles Italian government bonds (RTRS)
• Obama and Ryan Stay on Sidelines on Budget (WSJ)
• Volcker Rule Costs Tallied as U.S. Regulators Press Deadline (BBG)
• Faltering Chinese Factory Growth Adds to Rebound Fears (FT)
• Health Law Hits Late Snags as Rollout Approaches (WSJ)
• Apple Overtakes Coca-Cola as Most Valuable Brand, Study Finds (BBG)
• Euro-Area September Inflation Slows More Than Forecast on Energy (BBG) - Puting will fix that shortly

Trust Goldman to have keen, cutting-edge advice after the fact. Like now, a day after the collapse of the Italian government, when in a note, Goldman's Francesco Garzarelli who had been quite bullish on Italy, both in absolute and relative terms, flip-flops, and is now saying to no longer buy (i.e., sell) Italian bonds. To wit: 'The resignation of the PdL ministers will clearly increase volatility in the government bond market, similar to what happened between February and April, before the current government was formed. The spread between 10-year BTPs and German Bunds closed at around 260bp on Friday. At the end of April, we recommended going long Italian 10-yr BTPs against their French counterparts at spread of 221bp. We would be looking to close this position at Monday's levels."

European equities trade negatively as political tensions on both sides of the Atlantic dampens risk appetite and a lower than expected HSBC manufacturing PMI figure from China further weighs upon investor sentiment. In the US, government is on the precipice of the first shutdown since 1996 after House Republicans refused to pass a budget unless it involved a delay to Obama’s signature healthcare reforms. If the Republicans follow through with their threat a shutdown will occur at midnight tonight. As a result a fixed income in the US and core Europe benefit with investors wary of the immediate harm a shutdown will do to confidence in the economy.

This may become the most important article I’ve ever written. But whether it becomes that article or dwells in anonymity is up to you, the reader.