Daily US Opening News And Market Re-Cap: September 25

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From RanSquawk

  • ESM is able to diversify into banking debt as it expands, according to released guidelines.
  • Spanish Treasury sees lacklustre demand for their 3- and 6-month T-Bill issuance, as bid/cover ratios fall and yields rise across both lines.
  • European asset classes continue the wait-and-see play for any major developments in the Eurozone, as ECB President Draghi is set to meet German Chancellor Merkel later today.

Market Re-Cap

Risk-averse sentiment was prevalent throughout the session, after both Spain and Italy sold bonds/T-bills, which attracted weak bidding and hence saw lower than exp. b/c. In addition to that, yields on 3m and 6m Spanish T-bills were higher, with some pointing to the fact that the Treasury has been forced to step up its T-bill issuance to meet its zero net funding target (higher supply). As a result, peripheral bond yield spreads are wider by around 9bps, with Italian bonds underperforming given the supply later on in the week. This underperformance was also evident in the equity space, where the domestic stock exchange is seen lower by over 1%, compared to DAX which is only lower by 0.4%. In the FX space, firmer USD weighed on both EUR/USD and GBP/USD, both trading in close proximity to intraday option expiry levels.

Asian Headlines

The Nikkei 225 edged into minor positive territory, closing higher by 0.25%, as investors looked to buy stocks ahead of the deadline to qualify for mid-term dividends, offsetting a cut in earnings forecast from industrial giant Caterpillar late last night. The Shanghai Composite closed lower as expectations for imminent easing from the Chinese central bank are once again delayed by the announcement of USD 45bln in reverse repurchase operations which, historically, have weighed on hopes of a RRR cut from the PBOC. (RANsquawk)

EU & UK Headlines

The ESM is to invest mainly in official Euro debt rated AA and up, but is able to diversify into banking debt as it expands, and is to use derivatives for risk-management purposes only, according to ESM guidelines. (Newswires) The news prompted some risk-on trade in the knee-jerk reaction, upon the news that the ESM will be able to diversify into banking debts - a prospect not announced formally as yet.

The Spanish government is facing a backlash from its own conservative supporters over attempts by Madrid to calm separatist tensions in the Spanish region of Catalonia, hampering PM Rajoy's efforts to avoid a constitutional crisis. (FT-More) The wealthy region of Catalonia, with an economy the size of Portugal's, has argued that Spain's system for regional funding is a drain on their finances.

S&P have cut their Eurozone 2012 GDP forecast to -0.8% vs. Prev. view of -0.7%, also cuts 2013 GDP view to 0.0% vs. Prev. view of +0.3%, estimating that the Eurozone is to enter a new recessionary period. (Newswires)

Additionally, S&P have estimated that the Swiss National Bank bought around 48% of the Eurozone core's net financing needs for 2012 through it's FX diversification operations. S&P have said the SNB actions have caused much of the divergence between the core and peripheral yield spreads over the past year. (Newswires)

The Spanish Treasury saw lacklustre demand in their 3- and 6-month T-Bill issuance, with bid/cover ratios falling across both lines alongside increasing yields. As the Spanish Treasury has been forced to step up its T-bill issuance in order to meet its zero net-funding target, the auction results indicate that demand may not be as high as expected. As such, the Spanish-German 10yr government bond yield spread has been wider throughout the session today. (Newswires/RANsquawk)

Equities

European equities trade slightly lower heading into the North American crossover with little newsflow to prompt market direction, as investors continue the wait-and-see play for any major developments from the Eurozone. Nonetheless, some modest risk-off sentiment is observed in the equity space, with financials underperforming the broader indices. US stock futures currently trade higher, indicating a modestly higher open on Wall Street today.

In the latest news for the proposed aerospace mega tie-up between EADS and BAE Systems, source comments have said that the companies are discussing changing the 60-40 ratio of their proposed deal in favour of more weighting for EADS shareholders, with the ratio possibly being adjusted by up to 3%. The comments come as part of the ongoing negotiations regarding a mega-merger between the two firms, which still faces a number of hurdles including governmental approvals from France, Germany as well as the UK. In the immediate reaction, EADS shares popped higher by around 1%, with BAE Systems shares seeing weakness. (Newswires/RANsquawk)

FX

EUR started off on the back foot in the European session, as overnight Asian session lows were broken, prompting selling pressure in the EUR/USD pair. However, the decline has been offset by Middle-Eastern and European semi-official names providing demand below the 1.2900 handle, which is also said to be a decent-sized option expiry. The latest bank-diversification for the ESM news provided some confidence in the EUR currency, pushing the EUR/USD pair back into the green.

In early European trade, the GBP currency outperformed its European counterpart as heavy selling in the EUR/GBP cross drove the major pairs. Elsewhere, yesterday's broad-based AUD weakness has not carried across into today's session, as a 1.0400 option expiry in AUD/USD proves magnetic. AUD has also seen some support from the commodities market, which has pared back some of the last few session's heavy losses. (RANsquawk)

Commodities

WTI and Brent crude futures both trade higher heading into the NYMEX pit open in a slight paring of the recent heavy losses observed across the energy complex in the wake of global central bank easing. Spot gold and silver prices are moving in line with the broader commodities index, both higher on the session. Additionally, the moves come ahead of the Consumer Confidence numbers from the US, expected to show an improvement in sentiment, as well as the weekly API oil inventory numbers scheduled for release after the pit close today. (RANsquawk)