Overnight Sentiment: Defending 1400, Again
It was a week ago when we first observed that the defense of 1400 in the ES at all costs must go on, or else the only thing that is keeping the market propped up - psychology (now with the AAPL euphoria long gone), would be gone as would all support. But once again, the overnight session has proven that, with a little help from its central banking friends, 1400 (and 1.2900 in the EURUSD) can be defended. This was in danger of being breached until China reported two PMI numbers: an official one which printed at 50.2, or modest expansion, and up from 49.8, magically right on top of expectations of 50.2, and the HSBC PMI, which also rose to 49.5, from 47.9: the 12th straight contraction print, but the highest number in 8 months. The market spin is naturally that this is an indication of a rebounding China. Sadly, just like in the US, this is merely pre-party congress data manipulation. The only thing that does matter out of China: whether or not the country will actually ease as opposed to doing day to day reverse repo injections. Without the former, the Chinese economy will not rebound, and will not lead to an improvement in corporate outlook for US tech stocks, period, the end.
Elsewhere, no surprise from Europe continued to disappoint after UK PMI printed at 47.5, a decline from 48.1, and well below expectations of 48.0, with New Orders tumbling once again to 47.7 from 49.9, and manufacturers saying they cut production and shed jobs. Greece also reminded it is very much broken after MEGA reported that a member of socialist coalition-member PASOK, Michalis Kassis, would vote against the new austerity measures, joining the Democratic Left: 10 more defectors and the vote fails, leading to another government crisis and reincarnation of Grexit fears. Finally, and confirming that the US election next Tuesday is all important is the fact that the G-20 meeting in Mexico City on November 4-5 will be missing both Geithner and Draghi: so much for globalization in the priority chain of events.
The balance of the overnight recap comes from Deutsche Bank:
10 down, 2 to go and the last day of October proved to be a day of two halves for markets as risk-on sentiment at the European open gradually faded throughout the course of the US session. It was a fairly poor data and earnings day for markets. Starting off with earnings, the beat:miss ratio for the Stoxx600 companies was weak with nearly half of those reporting missing EPS consensus and 64% of those missing revenue forecasts. In the US, 65% exceeded earnings estimates, while revenue beats remained very poor at just 39%.
On the macro data front, our European economists were disappointed by the ECB lending survey which showed that a net 15% of banks tightened lending to corporates in Q3 (from 10% in the prior quarter) and a net 13% of institutions intend to further tighten lending standards in the next quarter. On the other side of the pond, the Chicago PMI rose less than expected (0.2ppt to 49.9 vs consensus of 51.0) and details were also soft. The production sub-index (51.8) fell to its lowest level since May while the employment measure also fell (50.3) to the lowest since December 2009. It will be interesting to see if this disappointment is reflected in today’s ISM manufacturing release given the strong correlation between the two surveys. The market is expecting 51.0 vs 51.5 last month.
Yesterday also saw ADP make extensive revisions to the last five months of employment data. The revised data show five consecutive months of downward revisions that averaged -61k/month. The September ADP figure alone was revised down from +162k to +88k with further revisions possible for October’s data scheduled for today.
As for markets the S&P500 closed flat on the day (+0.02%) after having traded as high as +0.5% shortly after the open. The index posted its first monthly decline since May but we’ll review our usual monthly performance below. US financials had a better day, closing up 0.61%, as bank stocks played catch-up with the solid earnings announced by their European counterparts earlier in the week.
Staying in the US, in their latest Global Economic Perspectives note our economists examine the uncertainty arising from the outcome of the election and growing concern about how the fiscal cliff will be handled. Moreover, Hooper et al highlight that the chances of “going over” the entire cliff are non-trivial. The good news is that if the current level of uncertainty subsides with a successful resolution of the US fiscal challenges ahead, growth could be boosted by as much as a percentage point or two.
Meanwhile the remnant of Superstorm Sandy is now heading north through Canada and continues to weaken.
Major transport infrastructure are slowly coming back online, including limited service at Newark and JFK airports. More than 5m households and businesses remain without power while schools in New York are likely to remain closed for the week. In terms of the economic impact, Joe LaVorgna thinks that overall US output (i.e. real GDP) may get a 60bp lift in the quarter, based on the historical effect of previous hurricanes, likely reflecting the almost immediate rebuilding efforts that take place. Analysing US data is going to be tough for a few months given this major disruption and subsequent rebuilding.
Turning to overnight moves, Asian markets are relatively mixed following the release of China’s official manufacturing PMI which came in-line with market expectations of 50.2 (vs 49.8 last month). Equities pared some of their initial losses on the back of HSBC’s final manufacturing PMI reading which came in 0.4pts above expectations (49.5 vs 49.1) and is now at eight-month highs. Gains are being led by the Hang Seng (+0.57%) and Nikkei (+0.2%) while the ASX200 (-1.3%) and KOSPI (-0.77%) are underperforming, the latter despite better than expected export numbers (+1.2%yoy vs -0.7%). Korea's HSBC Manufacturing PMI also saw an uptick in October (from 45.7 to 47.4). Onshore Chinese equities are having a strong day (+1.6%) led by property companies as domestic media report that several Chinese local governments have eased home purchasing restrictions (Chinese Securities Journal).
Back in Europe, the EU’s ban on naked short selling is due to come into effect today applying to sovereign debt and sovereign CDS (Reuters, FT). It will be worth keeping an eye on how this regulation impacts liquidity and spreads. In Greece, after a two-hour conference call amongst Eurogroup members, Eurogroup president Jean-Claude Juncker said in a statement that he expected a decision on Greece to be made at the finance ministers' face-to-face meeting on Nov. 12th. According to German FM Schauble, EU leaders expect to receive the final troika report on Nov. 11 or 12th (Reuters). On the question of OSI, Schauble said that for a large majority of euro zone countries accepting a "haircut" was legally impossible. Yesterday, the Greek coalition managed to pass a privatisation law in parliament by a narrow margin (148 votes for, 139 against). Almost 30 coalition MPs failed to back the law.
Ahead of Friday’s all-important payroll data, today will be relatively busy in terms of US data with the consumer confidence survey (originally scheduled for Tuesday), manufacturing ISM, construction spending, vehicles sales and weekly jobless claims all scheduled. Shell, Lloyds and Exxon Mobil are also reporting earnings today. In Europe we have the All Saints Day holiday across many countries which is delaying most of the PMI releases until tomorrow, but we do have Spain's important one to look forward to. Markets are expecting a 44.1 print.