Fiscal Cliff Headline Manic Depression Set To Continue
Today's "trading", in a repeat of what has become a daily routine, can be summarized as follows: flashing red headline about Fiscal Cliff hope/optimism/constructiveness out of a member of Congress who bought SPY calls in advance of statement: market soars; flashing red headlines about the inverse of Fiscal Cliff hope/optimism/constructiveness out a member of Congress who bought SPY puts in advance of statement: market plunges. Everything else is noise, as is said hope/expectations/constructiveness too since it is increasingly likely nothing will happen until the debt ceiling hike deadline in March, but stop hunts must take place in a market which nobody even pretends is driven by fundamental newsflow. Such as the bevy of PMIs released last night, the key of which was the China HSBC PMI as reported previously, which beat expectations by the smallest of possible increments, at 50.5, but rising to expansion territory and the highest in 13 months, which sent the EURUSD spiking and has kept it in the 1.3030 range for the duration of the overnight session. Sadly, those on the ground in China hardly felt the number was a bullish as EURUSD trading algos around the world, sending the Shanghai Composite to a fresh post-2008 low, closing down over 1% at 1,960. But let's just ignore this inconvenient datapoint shall we?
Europe then followed suit, with several goldilocks PMI numbers, as the Euroarea came right on top of expectations, with some weakness out of France and Italy, offsetting strength in Spain and the UK, and Germany also coming just as expected: France manufacturing PMI: 44,5., Exp 44.7, Italian Manufacturing PMI: 45.1, Exp. 46.0, Last 45.5, Spain Manufacturing PMI: 45.3, Exp. 43.9, Last 43.5; German Manufacturing PMI: 46.8, Exp. 46.8, Last 46.8. Euroarea November Manufacturing: 46.2, Exp. 46.2, Last 46.2. As Europe opened we finally got details of the Greek debt buyback which came in at higher prices than expected, which in turn has sent the yields of other European peripheral debt lower, if unclear just what thesis is being applied here.
As the final month of the year begins, here are the key events to keep an eye on via SocGen:
The final calendar month of the year kicks off today with a fairly busy agenda and yet another EU Ecofin gathering where ministers will assemble for talks over bailout terms for Greece (debt buyback) and Cyprus. The exact amount needed to recapitalise Cypriot banks has not yet been established but indications from the Troika suggest the funds will be roughly EUR10bn (of a total EUR17.5bn bailout). The exact amount is likely to be determined after the report on the banking system by Pimco (due for completion in January). In return for the funds, a fiscal adjustment of roughly 7.3% of GDP will be required between 2012 and 2016.
The post-Greece relief rally last week proved very short lived indeed and instead it was month-end flows that nudged the EUR/G10 higher. It was also curious to see 10y bund yields pinned below 1.40% as the Eurostoxx completed a 5.4% rebound from the mid-November lows. However, as month-end flows subside we should get a true picture of risk sentiment and whether a squeeze in the EUR can continue. Talks on the Greek debt buyback appeared to have ground to a halt after Greek banks voiced their opposition to being burdened by fresh losses after having already taken a hit in the March PSI. Let's see what EU finance ministers come up with today.
The data calendar is focused on manufacturing PMIs. The US index has dropped steadily since April's high of 54.8 and a fresh drop towards 50.0 would not do sentiment any good just as US House speaker Boehner hints that fiscal cliff talks are still light on substance
The complete event recap as usual comes from DB's Jim Reid:
After much 'bah-humbuging' I've finally succumbed, and much, much earlier than I usually do. Regular readers can guess why. Yes the Xmas tree went up on Saturday and I played an hour of Xmas songs while we decorated the tree. Three weeks today it will be Xmas Eve but we still have a lot to get through market wise before then. Unless you've been on a desert island then you'll clearly be aware of the fiscal cliff story that needs some kind of progress before Xmas to hit the first important deadline (Dec 31st). Outside of this we have possible QE4 being announced on the 12th and the potential landmark Japanese election on the 16th. As you'll see in the performance review at the end of today's EMR, Japanese equities have been one of the best performers in November on hopes of a more radical monetary policy framework with a new administration. Interestingly the S&P 500 lagged its peers last month on the fiscal cliff concerns. So there’s still a lot to process before the holidays.
Indeed given it’s the first of the month, today is PMI/ISM day which will as ever be a good real-time guide as to the momentum in the global economy. We start with the weekend release of China’s official PMI. The series came in at a 7-month high of 50.6 (vs 50.2 prior month). Despite coming a tad below expectations (50.8), DB’s Jun Ma sees this as an encouraging data point which was followed by the confirmation of the first >50 HSBC manufacturing PMI print in 13 months overnight. China’s non-manufacturing PMI for November also saw a modest improvement versus the previous month (55.6 v 55.5). Moving to Europe, we kick-off at 8:15am London time today with the Spanish manufacturing PMI followed shortly thereafter by the Italian equivalent. The market is expecting a marginal improvement in both the Spanish (43.9 vs 43.5 previous) as well as the Italian (46.0 vs 45.5) reading, although both should still remain well in contractionary territory. We also get the final readings for France, Germany and the Eurozone aggregate this morning. For the record, the flash estimates for these were 44.7, 46.8 and 46.2 respectively. In the US, we also have the final Markit PMI today where the consensus is going for a 51.7 (vs 52.4 preliminary reading and 51.0 for October). In terms of the manufacturing ISM, the market is expecting a small pullback to 51.5 (vs 51.7 previously).
Aside from today’s PMI, we can also expect a fairly busy week of central bank activities. The ECB, BoE, BoC, RBA and RBNZ are all meeting this week. With the notable exception of the RBA, the other central banks are expected to remain on hold. On the ECB, our European economists expect Draghi to maintain his moderately dovish tone at the post-meeting press conference.
Markets wise we are starting the week on a mixed tone overnight. Asian equity gains are being led by the ASX200 (+0.57%) and KOSPI (+0.48%) as investors are seemingly encouraged by the weekend’s Chinese PMI, although Chinese equities themselves are underperforming (Shanghai Comp -0.33%; Hang Seng - 0.21%). The Nikkei is continuing last month’s outperformance by trading 0.40% higher this morning helped by a stronger-than-expected capital spending (ex software) report (+2.4% v +1.0%) for Q3. Looking slightly ahead its worth noting the busy political month in North Asia with Japan and South Korea holding elections on the 16th and 19th, respectively. Elsewhere the EURUSD is up 0.3% and consolidating above the key 1.300 level on the better risk tone.
Taking a briefly look at some weekend headlines, Republican and Democrat positions remain as entrenched as ever as both sides traded blame over the weekend for the current fiscal cliff stalemate.
Bloomberg highlighted that there is a “small and potentially influential group of lawmakers in both parties that is emerging as fiscal-cliff sceptics, willing -- and some even arguing -- to take the dive” rather than reaching for a compromise that violates their principles. In Europe, the FT wrote that Merkel is prepared to forgive some of Greece’s debt once Greece’s budget moves into surplus. Elsewhere, La Razon newspaper quoted Rajoy as saying it is very complicated to meet Spain’s 2012 deficit goal of 6.3% of GDP and that he would not hesitate to seek ECB assistance if needed. Spanish 10 year yields closed at the lowest since March on Friday at 5.31%.
More onto the week ahead, details of Greece’s bond buyback including the size, scope and pricing are expected to be announced today. We’re also likely to get more statements on Greece with the Eurogroup/ECOFIN meeting starting today in Brussels. Aside from the PMIs, other notable data releases include the Eurozone’s preliminary Q3 GDP and German factory orders (Thursday). Spain reports unemployment (Wednesday) and IP (Thursday) this week. A Spanish auction involving 3yr, 7yr and 10yr bonds on Wednesday is also worth noting. In the UK, the Chancellor will outline his autumn statement of fiscal and economic forecasts to parliament on Wednesday.
Moving to the US, we have a busy week of data leading up to Friday’s payroll. For now, Joe expects a hurricane-impacted +25k gain on the headline (+35k private) and a one-tenth increase in the unemployment rate (to 8.0%). Ahead of that, today’s motor vehicle sales, Wednesday’s factory orders and ADP report, Thursday’s jobless claims and Friday’s UofM consumer confidence and consumer credit data are all notable releases.
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