Overnight Sentiment: Looking Forward To Today's Big Event
Today it is all about the elections.
- It is not about last night's relatively surprising RBA decision to not cut rates (on an attempt to create a reflexive feedback loop when it said that China has bottomed; it hasn't, and the RBA will be forced into another "surprising" rate cut as it did previously).
- It is also not about Europe missing its Service PMI estimate (just like the US), with the composite printing at 45.7 on expectations of a 45.8 print (with both core countries - Germany and France - missing badly, at 48.4 and 44.6 on expectations of 49.3 and 46.2, respectively).
- It is not about reports that the EU believes Spain's GDP will again contract more than expected (it will, and certainly without any reports or beliefs).
- It is not about Greece selling €1.3 billion in 26-week bills even as, according to ANA, its striking power workers have taken 5 power plants online just as winter approaches.
- It is not about Jean-Claude Juncker telling the truth for once, and saying that Europe is still in crisis, and is facing the viability of the Euro (after saying weeks ago that the Euro is unshakable) and that some countries aren't facing up to their responsibilities.
- It most certainly isn't about German factory orders finally collapsing as the country is no longer able to delay its slide into full-blown recession, with a September decline of 3.3% on expectations of a modest drop of -0.5%, from the previous decline of 0.8% (the German ministry said that a weak Eurozone and lack of global growth are taking its toll; they will continue taking its toll for years and decades longer).
- It is not about the November 8 Eurogroup meeting being postponed as there is nothing to discuss, with both Greece and Spain still undecided (with Rajoy once again repeating that he needs to know the rescue would bring down Spanish yields).
No. It is all about the US elections, with the peak frenzy starting as soon as polls officially close at 8 pm. Everything else is noise.
Some more event recaps from Bloomberg:
- Greece headed for a cliffhanger vote on austerity measures needed to keep the bailout on track as a 48-hour general strike began and European officials squabble over the timing of a deal to unlock rescue funds
- Wall Street’s credit-derivatives traders, who before the financial crisis commanded $2 million of annual pay, are being replaced by machines as banks cut costs and heed new regulations
- German factory orders fell the most in a year in September as Europe’s sovereign debt crisis and slowing economic growth prompted companies to reduce investment
- BofAML Corporate Master Index OAS steady at 151bps, near YTD low 146bps reached last month, as $22.525b priced yesterday.
- Markit IG at 97bps, YTD low 83bps. High Yield Master II OAS widens 3bps to 557bps as $800m priced; Markit HY at 511bps; YTD low 445bps
SocGen lists the other key macro events for the day:
Yesterday's downward move for the EUR/G10 and EUR/USD to below 1.2800 is particularly difficult to reconcile with the weekly IMM positioning data and suggests market participants are simply hunkering down for the US election and Greece event risks which lie ahead this week. Even though short EUR positions rose a tad last week (96,393 contracts), this is about where positions were in early October when the EUR/USD traded above 1.30. With price action begetting price action, it is therefore tempting to think that further EUR downside lies ahead, although this would be difficult to back by Spanish 2Y bond yields which in fact are not trading that far from where they were three weeks ago. Obviously, the fact that German 2Y cash yields have dropped back into negative territory is different from three weeks ago. The EUR/USD 2Y swap spread has been whittled back to -28bp, but it is too soon to position for what the ECB may or may not announce on Thursday. Simply put, G10 FX, bonds and equities will obviously keep close track of developments across the Atlantic, but knee-jerk reactions on a scale of that witnessed in 2008 (the S&P tanked 10% in the two trading days following US election day) would be a stretch. Various polls suggest the outcome is a close call, but a Romney win would still be the bigger surprise. At the end of the day however, it is the margin of victory for whichever candidate wins (and the majority party in Congress) which will define market sentiment, as this should determine the speed at which mutual ground can be reached on the public deficit. The events of summer 2011 do not bode well for risk assets should there be another gridlock.
Data wise today, we get the final EU PMIs, EU PPI, German manufacturing orders and UK industrial output.
Finally, as usual, the comprehensive must read summary comes from DB's Jim Reid and team:
So we've arrived at the big day for global politics. Yes we are exactly half way through the UK coalition's 5 year term in office! To mark this monumental point in time the US has decided to hold an election! I couldn't resist seeing what I wrote about the US election 4 years ago in the EMR and here are my remarks that appeared in the third paragraph that day, demonstrating its relative lack of interest compared to this one. So from November 4th 2008 we have.... "We are not sure if an election result has ever mattered so little to the markets. Whoever gets elected will have to deal with things larger than normal party politics so it’s no surprise to us that there hasn't been the usual research dedicated to what will happen to the market under either the next Republican or Democratic administration." Four years on and you can't turn a page (physically or virtually) without seeing a predictions for what an Obama or Romney victory will mean and even how this changes depending on the margin of victory.
Indeed we could be at a political crossroads where this election result could mean more than any in living memory. There are again issues at stake here far, far greater than normal party politics but this time there may be a different approach or at least the attempts of a different approach. Clearly this might prove to be a red herring and the outcome could easily be a non-event in the fullness of time but there is a possibility that this election could influence the two things that have made the US be one of the few major economies of the developed world to escape a recession or at least one negative quarter of growth over the last 12 months.
Basically it all boils down to what the election means for fiscal and monetary policy. The US has so far used both weapons in extremis to tackle this crisis and it has helped them out-perform most of their developed market peers on growth even if this has been the second weakest presidency in terms of growth on record, only behind the 1928-32 electoral cycle. So although the S&P 500 has returned a fairly outsized 59% since last election day largely due to the phenomenal liquidity, the economy has only grown 3.3% in real terms over 4 years and 9.6% in nominal terms. Very weak numbers but ones that could have been much much worse without aggressive intervention. The same might be true going forward for a number of years yet.
We would argue that the best chance of short-term stability and market performance is anything that keeps deficit spending relatively high for now and keeps the Fed at its most accommodative. The long term consequences of such policies are highly contentious but the market cares more about the near-term. As we discussed yesterday the worst case market scenario is likely to be a narrow Obama victory where a bruised Republican party have enough power and frustration to cause large fiscal cliff tensions.
It may never arise but surely the market would factor in some risk even if it's not immediate. A clear victory for Obama would probably reduce but not eliminate this risk. A Romney win would likely be market positive initially with the risk being that the market turns its attention to what it means for Fed accommodation.
We think Romney would eventually have to be pragmatic and keep the Fed similar to what it is today but again the market might worry first.
I spoke to our man in Washington Frank Kelly late last night and he still thinks the mainstream opinion polls are too Obama friendly and he thinks Romney still has a very very small edge. He's perhaps a little more nervous of this non-consensual view than he was on the call last week but he still holds it. He suggests the weather in Virginia and Ohio could be crucial. So for the first and last time in the EMR here is today's general forecast for both states. In Ohio, conditions are likely to be mostly sunny with highs in the mid-40s (Fahrenheit) and little to no precipitation expected. Similar conditions are expected in Virginia with forecasts of a partly sunny morning, then becoming cloudy with little to no precipitation and temperatures in the low 50s (National Weather Service). If these decent conditions materialise it is likely to be a small boost to Obama. Virginia is one of the early states to declare results and this may give us the best clue to the overall outcome. Polls close in Virginia at 7pm US Eastern time, followed by Ohio half an hour later. Although given how close the pre-election polls are in Ohio and Virginia, some pundits expect that results in both states will not be clear until after midnight.
Asian markets are mixed overnight with Chinese (-1.5%) and Japanese (-0.5%) bourses underperforming benchmarks in South Korea (+0.6%), Taiwan (+0.2%) and Australia (+0.2%). The Reserve Bank of Australia overnight kept its key rate unchanged stating that risks are more balanced now with recent data from China showing some stabilisation in growth. The AUD spiked +0.5% higher against the Greenback following the central bank announcement. Elsewhere the UST 10-year yield, Gold and Brent are all little changed at 1.693%, $1686/oz, and $107.7/bbl respectively.
In terms of yesterday, equity markets were mostly negative throughout the day only to be pulled up into positive territory by a late afternoon rally in the US. The S&P 500 closed +0.22% helped by the strength in Tech stocks (+0.73%) as Apple (+1.36%) reportedly sold 3 million iPad minis over the weekend. October’s non-manufacturing ISM slightly disappointed (54.2 v 54.5 expected) although the employment subcomponent was stronger with the series up 3.8pts to 54.9 (the highest level since March 2012).
Back in Europe, yesterday saw the CAC, IBEX and FTSEMIB and Stoxx Bank indices shed - 1.26%, -1.89%, -1.43%, and -1.67% respectively. The 2yr Bund yield (-0.008%) closed below zero for the first time in two months. Bank stocks were impacted by some weak sector earnings and economic data was far from encouraging. Spanish unemployment rose more than expected (128.2 v 110.0) while UK services PMI also disappointed (50.6 v 52.0). The peripheral equity underperformance was probably a reflection of some concerns that the Greek coalition government may not be able to secure support for the Troika program. The first vote takes place tomorrow. The final leg of the European trading session was perhaps also tainted by a Reuters report noting the Eurozone had yet to find a formula to make Greek debt sustainable and the coming Eurogroup meeting (12th November) may not yield a decision on Greece’s next bailout payment. However the article did say that Greece could meet its financial obligations without further assistance until the end of November or even early December. The Greek finance ministry submitted its EUR13.5bn austerity bill to parliament yesterday, which is the first formal step before a formal parliamentary vote on Wednesday
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