Overnight Sentiment: Nothing But Cliff
By this point it has become clear to everyone that all fact-based news can be safely ignored, and all that matters is the ongoing Fiscal Cliff pantomime as has been the case for the past month. Sure enough, looking at the futures, it is clear that following yesterday's detailed disclosure, the market is convinced, that a deal is virtually assured. This is in stark contrast to 48 hours ago, when it thought the opposite. It will likely continue thinking this until Boehner has a TV press conference later today and bursts the latest bubble of bipolar enthusiasm which has now shifted to euphoric for the time being.
In the realm of FX, SocGen notes that Bundesbank's prediction yesterday that German Q4 GDP could be ‘markedly' negative briefly put the skids under EUR/G10, but the weakness has proved temporary to the point where market participants have to wonder if there is any point in resisting mild positive EUR momentum into year end. The final two weeks of the calendar years of 2006, 2007, 2008 and 2010 brought festive cheer for EUR bulls, and listening to EU Council head Van Rompuy yesterday you might have been led to believe that the single currency is now a one-way (bullish) bet. Because there is nothing as sustainable as a currency relying on political rhetoric as a fundamental driver of value.
Continuing in FX, the Swedish Riksbank cut its interest rate from 1.25% to 1.00% in line with expectations.
Concluding Europe, the main news was out of Spain which sold a total of €3.53 billion in 3 and 6 month Bills, just above the indicated range of €2.5 -3.5 billion, which in turn pushed the EUR higher. What the EUR has decided to ignore is the update in Spanish bank bad loans which surged to a new all time record of 11.23%, up from 10.7% (to be charted shortly).
Elsewhere, the most recent bout of euphoria in China may be fizzling, after the SHCOMP managed a tiny 0.1% rise to 2162.46, while the Hang Seng already dipped into the red, down -0.08% to 22494.7.
And with these highlights out of the way, we resume watching tick by tick developments out of DC, which in a centrally-planned market, are the only thing that matters to stocks.
More from DB's Jim Reid:
So only 7 days to go now until Santa brings us lots of presents and forces us to eat too much food! I actually had my first Xmas lunch yesterday and had that well known Christmas delicacy 'lots of steak'. I've got a feeling the next week or so is going to require 'lots of exercise' to redress the balance. The market was also in festive mood yesterday, sensing an early Xmas present (S&P 500 +1.19%) as hopes rose that a fiscal cliff deal wasn't too far away as Boehner weekend tax concessions were interpreted by some as the first step towards a compromise. So after weeks of stalemate, there are signs that fiscal cliff negotiations are now progressing at a much faster rate and it appears that the next few days could be critical.
Overnight, Bloomberg reported that Obama has made a counteroffer to increase taxes on those earning more than $400k (up from his previous proposal of $250k) that will raise $1.3 trillion in revenues over the next decade. Other revenue measures that are thought to be included in Obama’s counteroffer include setting the top tax rate on dividends and capital gains at 20% and returning the estate tax to 2009 parameters with a $3.5m per-person exemption and a 45% top tax rate. On the spending side of the equation, $930bn in spending cuts are being targeted including $400bn in savings from health programs, $400bn from other mandatory spending programs such as defense, and $130bn from changing the indexation of social security payments to a “chained-CPI measure” (which would allow for the substitution effect when calculating prices of the consumer basket). Obama’s plans have also factored in $290bn in estimated lower interest payments as a result of a lower deficit, to bring total savings to around $1.2 trillion.
The White House will also seek to raise the debt limit by an amount sufficient to delay a debate on the issue for two years. Obama has also proposed the extension of unemployment insurance benefits and $50bn in infrastructure spending. However, payroll tax cuts are likely to lapse. According to the Bloomberg article Boehner’s spokesman was reported to have said that the counter-offer is “a step in the right direction” although “it cannot be considered balanced”. Boehner will provide an update on negotiations to House Republicans at their weekly conference meeting tomorrow (Bloomberg).
Overnight markets have responded positively to the headlines with the S&P500 futures rising 0.35% following news of Obama’s proposals (+0.25% as we type). Asian equities are also better bid, paced by the ASX200 (+0.45%), KOSPI (+0.24%) and Hang Seng (+0.17%). The Nikkei is outperforming, up a further 1.2% overnight and consolidating just below the 10000 level last seen in April this year. Japanese sentiment is being helped by comments from incoming PM Shinzo Abe who said that he would “set a policy accord” with the BoJ for a mandatory inflation target of 2% backed by “unlimited monetary stimulus”. USDJPY is relatively stable at 84.00 or +0.1% overnight and 10yr JGB yields are 3bp higher at 0.769% ahead of the BoJ’s meeting on Thursday. In the commodity space, the Chinese import iron ore price index added 2.2% yesterday taking it to five-month highs of $132/mt.
Notably, the index has rallied for the past ten consecutive days, adding 14% over the same period.
Turning to Europe, the Guardian reported that Mario Monti will outline his future plans with respect to next year’s election in his end-of-year address scheduled for Friday 11am London time. Citing Italian media, the Guardian suggests that Mario could either present a list of candidates and parties who support him in a post-election coalition, or he could present a reform manifesto which parties could back. In Greece, there were no major surprises from the troika’s report on Greece which described the “very large” risks to reforms stemming from political resistance and potential court challenges to budget reforms. The report also warned that Greece’s tax collection system is failing to meet its targets, and that privatisations have been disappointing.
Turning to the day ahead now, the immediate focus will be on any feedback from the Republicans on Obama’s counteroffer. Boehner meets with House Republicans at their weekly conference at 9am USEST (2pm London), which will be followed immediately by a press conference where we will get further detail on the state of cliff negotiations. Data-wise, in the US the Q3 current account balance and NAHB housing index are the economic data points of note, while in the UK, November CPI, PPI and retail data due.
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