Overnight Sentiment: Pre-European Summity
If yesterday it was Greece that the market was once again inexplicably enthused about, today it is Spain's turn, which is once again in the open-ended action crosshairs, following an unsourced (are there any other kind these days?) report by the FT, saying the country with the 25% unemployment is prepared for an imminent bailout request (contrary to a previous report by Reuters saying the ETA on this is November). That these are simply more bureaucratic tests to gauge the market's response is by now known to all - the truth is nobody knows what happens even if Spain finally requests a (long overdue and priced in) rescue. Because even with bond yields briefly sliding, they will only ramp right back up, even as the Spanish economic deterioration continues. But that bridge will be crossed only when Rajoy is prepared to hand in his resignation together with a signed MOU to a Troika boarding commission. In other news, Spain sold €3.4 billion in 1 year Bills at a yield of 2.823% compared to 2.835% last, and €1.46 billion in 18 month Bills at a yield of 3.022% versus 3.072% last. Since both of these are within the LTRO's maturity (whose 1 year anniversary, and potential partial repayments, is coming fast in January) the bond was a token exercise in optics. Elsewhere, German ZEW Economic Sentiment rose more than expected from -18.2 to -11.5 on expectations of a -14.9 print, despite the ZEW's Dick summarizing the current Eurozone situation simply as "bad", and adding that "downward risks are more pronounced than upward." Confirming his fears was a government official sited by Bild who said that 2013 growth has been reduced from 1.6% to 1.0%. In all this newsflow, the EURUSD has quietly managed to do its usual early am levitation, and was at overnight highs of 1.3015 at last check.
In other beggars can be choosers news, Spain, which has yet to take the action which the market gave it credit for 3 months ago, is urging Europe to hurry up and make its temporary non-bailout, permanent by endorsing a banking and fiscal union. To wit, and just like in June, Spain calls for EU leaders to work on an “ambitious” calendar to move towards banking and fiscal union at a summit in Brussels on Oct. 18-19. Spain proposes three phases to achieve fiscal union in short term, starting with common bills issuance. Spain says banking union must be achieved in short term. Spanish proposals were distributed to reporters by prime minister’s office in Madrid according to Bloomberg. In other words, Spain is itching for Germany to onboard Spanish fiscal risk indefinitely and asap... and of course to fund all future Spanish capital shortfalls using consolidated debt issuance.
A more complete recap from DB's Jim Reid:
Market sentiment remains supportive overnight and perhaps further bolstered by a FT story which suggested that the Spanish government is prepared to make a rescue request that would trigger ECB’s OMT program. However the issue is being delayed by external factors such as the way it would influence other countries like Italy. According to the FT article, which was published after the US close, European officials are said to be divided over the impact of such a Spanish move would be for Italy. Some argue it would reduce Italy’s borrowing costs and others believing the market would immediately force Rome to request similar assistance. A senior official within the Spanish ministry of economy was quoted as to having said that the country did not require any ESM funding but would be comfortable making a request for a credit line only in order to satisfy the conditions of the ECB to begin buying bonds. This article follows a statement from the Mexican President yesterday, who said after his meeting with Rajoy that the Spanish PM “is confident” of securing an appropriate deal with EU partners so that the country can officially request aid.
Recapping the overnight moves here the KOSPI and ASX200 up +0.7% and +0.3% respectively as well as most of the equity benchmarks in Asia. The Nikkei is outperforming the region (+1.3%) helped by Softbank Corp’s (+10%) announcement to buy a majority stake in US mobile operator Sprint. Credit spreads are also rallying tighter in Asia as technicals remain extremely favourable.
The Asia IG is 1-2bp tighter on the day and new IG deals are generally trading inside re-offer levels. In other developments S&P downgraded 11 Spanish banks, which shouldn’t come as a surprise following the rating agency's double-notch downgrade of the sovereign rating last week.
Back to Citi’s Q3 results the group posted earnings and revenues which were 8% and 4% above Bloomberg consensus respectively. Our equity analyst noted that the result saw upside from strong fixed income trading and higher net interest income. FICC trading rose 31% qoq while NIM rose 5bps. The latter was reassuring in the context of concerns about shrinking NIMs post-Wells Fargo’s results the prior day. Citigroup’s shares finished up 5.5%.
On the data front, September retail sales were much stronger than expected (headline +1.1%mom vs 0.7% expected), particularly given that July and August numbers were both revised upwards.
Speaking of the elections a lot will be at stake in the second US presidential debate today (starts 9pm US EST). Indeed after a strong showing from the Republican leader in the first round latest data shows that Obama and Romney are running neck and neck in the opinion polls. Today’s debate will be a townhall format where the audience are allowed ask question which should make it a very interesting event.
Away from politics, yesterday was a pretty active day for Fedspeak. Dudley reiterated his dovish stance and noted that the Fed’s current stance will remain accommodative “for quite some time”. Speaking overnight, the Fed’s William made similar comments. Dudley also added that he was concerned that the “concentration of mortgage origination volumes at a few key financial institutions” meant that low interest rates were not being passed to borrowers. Bullard, a non-voter, was less dovish, saying that growth will pick up to 3.5% next year and unemployment will fall to 7% and current policy settings will be outcome- based. Lacker reiterated his opposition to QE3, saying that job market weakness in Q2 was only temporary. Gold fell 1% yesterday and in what was the precious metal’s biggest one day decline since July.
It was a relatively quiet session for European markets yesterday. Spanish 10yr bond yields rose 19bps yesterday to 5.82%, reversing all of the gains towards the end of last week. In Greece, PM Samaras said that he expects to reach a deal with the Troika before the Thursday’s EU summit in Brussels. A Greek finance ministry official said that the next tranche of bailout cash will be disbursed by November 15. The statements were echoed by the EU's Olli Rehn who commented that he expects a deal to be reached in the coming days. In contrast, reports from the Ekathimerini suggested that an agreement between Greece and the troika remains some distance away. In other news headlines, the ESM has started buying short-dated SSA paper a week after its inauguration.
And here, from SocGen, is what key events to look out for today:
The financial markets started the week on an uncertain note again: at the beginning of last week the Eurogroup meeting closed having reached no conclusions. Will we see the same from the EU summit opening Thursday? We do not expect any advances on Greece: the Minister of Finance yesterday stated that it would be difficult to reach an agreement by Thursday and that an extraordinary summit would likely be required at end-October. In early October the Troika requested Greece review the budget restrictions it is to implement to cover its 2013 and 2014 financing needs, and to apply the 89 measures agreed in March, notably regarding the job market and privatisation programmes. Thus, developments are unlikely on this front. Mr Rajoy remains silent in Spain. Lastly, the long-term budget and banking projects must be addressed: convergence will take time. We note that the October 2011 EU summit, which had addressed Greek PSI for the second bail-out, EFSF leverage and European banking, had been well received by the markets. At the time, the EUR/USD had risen from 1.38 to 1.4228 in two sessions, but had just as quickly reversed as many questions were left unanswered. We remain prudent regarding the outcome of the 2012 meeting and want to see more than announcements before exulting. We find nothing promising in yesterday's draft that has circulated. The news saying that Spain would be ready to ask for a bailout was risk-positive this morning. Let's hope that facts will follow. News flow will be rich today. However, it is unlikely to challenge current market trends.