European equities trade negatively as political tensions on both sides of the Atlantic dampens risk appetite and a lower than expected HSBC manufacturing PMI figure from China further weighs upon investor sentiment. In the US, government is on the precipice of the first shutdown since 1996 after House Republicans refused to pass a budget unless it involved a delay to Obama’s signature healthcare reforms. If the Republicans follow through with their threat a shutdown will occur at midnight tonight. As a result a fixed income in the US and core Europe benefit with investors wary of the immediate harm a shutdown will do to confidence in the economy.
Meanwhile, Italy’s former PM and leader of Italy’s main centre-right party Silvio Berlusconi, has called for fresh elections “as soon as possible” after ordering his five ministers to resign from the coalition government he formed with Prime Minister Enrico Letta’s Democrats last April. While the President Napolitano has sought to resist another election, just over 100 days after the formation of the current government, this may be the only option if another majority coalition is not promptly formed. Current PM Enrico Letta is likely to appear in parliament on Wednesday and seek a confidence vote before proposing reforms in the electoral law in order to avoid a repeat of the recent tumult. As a consequence of the uncertainty surrounding the future of the Italian government the IT GE 10y spread had widened to levels not seen since June, and Italian banks remain the worst performing stocks in Europe. Looking ahead markets will be anticipating the release of US Chicago PMI and Canadian GDP.
Overnight news bulletin from RanSquawk and Bloomberg
- The US government is on the precipice of shutdown after Republicans refused to pass a budget unless it involved a delay to Obama’s signature healthcare reforms.
- Silvio Berlusconi, leader of Italy’s main centre-right party, has called for fresh elections “as soon as possible” after ordering his five ministers to resign from the coalition government.
- Chinese HSBC Manufacturing PMI (Sep F) M/M 50.2 vs. Exp. 51.2 (Prev. 50.1)
- Treasuries higher as U.S. government stands poised for its first partial shutdown in 17 years at midnight tonight, after a weekend with no signs of negotiations or compromise from either the House or Senate to avert it
- Unemployment in the 17-nation euro area remained at a record high of 12.1 percent in August, according to the median estimate of 30 economists in a Bloomberg News survey
- The unemployment rate measure has contributed to the market’s confusion over the direction of monetary policy, and Fed officials now are struggling with how to minimize it as a policy benchmark without damaging their credibility, according to Ethan Harris, co-head of global economics research at BofAML
- As the threat of renewed crisis in the euro area emanating from Italy raised pressure for an agreement, senior members of Merkel’s Christian Democratic Union meeting in Berlin today announced that talks would be convened at the end of the week
- Italian Prime Minister Enrico Letta defied Silvio Berlusconi’s attempt to force snap elections and said he plans to seek a new parliamentary majority to salvage his stricken government
- Sovereign yields mostly lower, peripherals spreads wider, Nikkei drops 2.1%, Asian indexes other than Chinese lower. European stocks, S&P 500 futures down. WTI crude, copper and gold rise
The Asia-Pacific session was dominated by the Western European and US political woes, as both the Hang Seng Index and Nikkei 225 fell in overnight trading. Nonetheless, both indices registered strong gains over the month of September, and ahead of the Chinese holidays for the rest of the week. Bucking the trend in Shanghai, the Composite index closed up 0.7% as the opening of the Free Trade Zone firmed investor sentiment, as the economically liberated area is seen lifting demand and growth.
EU & UK Headlines
Silvio Berlusconi, leader of Italy’s main centre-right party, has called for fresh elections “as soon as possible” after ordering his five ministers to resign from the coalition government he formed with Prime Minister Enrico Letta’s Democrats last April.
Additionally, Italian President Napolitano has said he has no intention to dissolve parliament and push the Italian population into a fresh round of voting. (La Repubblica/Corriere della Serra) Napolitano added that a fresh round of voting is a last resort and Italy must first attempt to find a majority coalition before any other options are considered. There were also reports that Italian PM Letta will appear in Parliament, probably on Wednesday and will seek a confidence vote. Letta stated that he has proposals ready for a new electoral law to avoid a deadlock in the future, adding that a new Italian election with the current voting law would lead to no clear majority in Parliament.
German Retail Sales (Aug) M/M 0.5% vs. Exp. 0.8% (Prev. -1.4%, Rev. -0.2%), Y/Y 0.3% vs. Exp. 0.6% (Prev. 2.3%, Rev. 2.9%)
UK Mortgage Approvals (Aug) M/M 62.2K vs. Exp. 61.5K (Prev. 60.6K, Rev. 60.9K)
Prime Minister David Cameron defied critics of his government’s “Help to Buy” program to aid Britons frozen out of the property market by the need for high deposits, saying the second phase will start this week, three months earlier than planned. (Newswires)
The US government is on the precipice of a historic shutdown after House Republicans refused to pass a budget unless it involved a delay to Obama’s signature healthcare reforms. (Observer) There was a growing sense on Capitol Hill on Sunday that House Republicans were prepared to see through their threat of a shutdown, which would begin at 0501BST on Tuesday.
Moody's said the US will probably increase the debt limit and avoid a government shutdown. Moody's added that a government shutdown wouldn't affect debt service. Moody's further stated that a debt cap failure would lead to perceived default risk and that failure to raise the debt limit is worse than a shutdown. (Newswires)
Janet Yellen record gives pointer to Fed policy if Obama picks her as chair. (FT-More) The report says that a decision to appoint Ms Yellen could come this week, if there is a window of calm between averting a government shutdown and President Barack Obama’s departure on a trip to Asia.
Barclays month-end extension: Treasury +0.06y
In European trade the Italian FTSE MIB has underperformed following rising political tensions over the weekend, As a result of these recent events several small-cap Italian banks have been halted in trade and are likely to be in and out of trade for the remainder of the session.The greatest decliners across European indices are Italian banks.
UK Homebuilders have risen in morning trade, as the UK PM Cameron has advanced the start date of the Help to Buy scheme, raising buyer sentiment for the industry, and lifting related stocks. US stock futures trade lower ahead of the open, indicating a lower open on Wall Street today.
Safe haven currencies benefit from low risk appetite amid political uncertainty on both sides of the Atlantic Ocean.The CHF sees strength, especially against the EUR as the potential breakup of the Italian government sees investors flee from the single currency. Meanwhile USD remains flat as the investors await the result of negotiations of Democrats and Republicans later today.
Both Brent and WTI crude futures trade with losses ahead of the NYMEX pit open, as political wrangling hits the riskier assets and the continued moderation in Iranian relations press energy markets lower. On the topic, Morgan Stanley have said that the oil market would be 'flooded' if Iranian sanctions are fully withdrawn. Additionally, the poorer than expected Chinese HSBC Manufacturing PMI has counteracted the bullish Chinese equities, which rose alongside the opening of Shanghai's Free Trade Zone, leading spot gold to trade flat ahead of the COMEX open.
Iran is willing to discuss limits in the level to which it enriches uranium but will never suspend the process altogether, the deputy foreign minister said in comments reported on Sunday. (ZeeNews)
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DB's Jim Reid's conclude the overnight recap in a way only he can
It’s a week that the US and Italian Governments could be in shutdown and breakdown mode respectively. Indeed after the weekend's activity (or lack of it) it now looks almost certain that we'll get a shutdown after midnight tonight in the US. Meanwhile Berlusconi has thrown Italian politics into potential chaos again after ordering his 5 ministers to resign from the coalition. It’s an impressive feat to knock-off a potential US government shutdown from top billing but Berlusconi might have achieved it. He initially seemed to be demanding new elections on Sunday morning but noises came later in the day that support for his actions weren't unanimous within his party which seemed to prompt Berlusconi to offer the possibility that his party could still support the current Government's 2014 budget if concessions on planned tax increases were made.
Moving to the US it now appears almost certain, according to DB’s Frank Kelly, that the US government will shut down at midnight tonight (September 30th) for the first time since 1996 after the Republican-controlled House of Representatives passed a continuing resolution early Sunday morning which would fund the government through to December 15th but included an amendment to delay Obamacare by one year and repeal a related tax on medical devices. The bill is now with the Democrat-controlled Senate where majority Leader Harry Reid has already stated the bill is unacceptable. As we write the Senate is not even set to come back into session until 2p.m. Monday afternoon leaving Congress just hours to avoid a shutdown. If no agreement is reached the federal government will shut down all nonessential operations on October 1st which will stay shut down until a new law is agreed by Congress and signed by the President. Frank’s current view is that a shutdown will not last too long and he has a baseline figure of around 2-5 days, with a lot depending on the public reaction to the shutdown.
Whilst a temporary government shutdown may not be disastrous there are two points of real concern. First the weekend’s events do suggest that this morning’s grid-locked Congress is more dangerous than the grid-locked Congress of Friday night as the Republican leadership (represented by House Speaker Boehner, Majority Leader Eric Cantor and Majority Whip Kevin McCarthy) appears to have lost control over the Republican conservative rank-and-file who have forced this confrontation upon the Leadership having rejected a number of strategies which would have avoided it. This increases the chances that the House Republicans fail to pass a bill which has any hope of being acceptable by the Senate Democrats and President Obama. The second major worry is the hanging question of where this leaves the far more dangerous debt ceiling issue, as the US gets ever close to its debt limit (best estimates place the date for hitting the ceiling at October 17th). There is some cause for hope on the debt ceiling front however. The House Republican Leadership know that they have around 100 Republican votes they can rely on and may, when it comes to the bigger issuer of the US debt ceiling, cross party lines and work with the White House/Senate to get a deal done, leaving the hard-core Republican/Tea Party elements behind and preventing a default.
Looking to today’s events the Senate may simply table the House bill, which would require 51 votes and could be achieved with Democrat votes alone. This would leave the House in exactly the same place as they found themselves on Friday evening and leave the House Republican leadership and Boehner in particular with the choice to put the “clean” Senate bill on the floor or try again to amend the bill. If the House again attempted to amend the bill this would almost certainly lead to a government shutdown.
Outside of today’s looming US budget deadline we have an important week ahead with the highlights being US nonfarm payrolls, the ISM/PMI data, and ECB, BoJ and RBA meetings. China’s markets will be closed beginning Tuesday for a week long National Day holiday. Before the holidays, China has kicked the data week off with a soft HSBC/Markit PMI manufacturing number of 50.2 in September vs 51.2 expected (50.1 in August). In response to the weekend's political news, Asian markets are soft but not spectacularly so. S&P 500 futures are around -0.6% lower, with Japan’s Topix and the Hang both around -1.3% lower. 10 year Treasuries are 2bp lower at 2.60%.
At the end of the week we in theory have a fascinating payrolls number but with a shutdown there is a likelihood that it gets postponed. If the number does get released, what intrigues us is the fact that we now move out of a period that payrolls have tended to be seasonally weak through history. June-August numbers tend to be lower than the rest of the year. So will September's number confirm that we are still in a relatively subdued job creation environment or will the seasonals start to pick up and maybe show that the summer numbers weren't representative of underlying activity? Our base case is that growth whilst positive will be behind trend for sometime and not allow strong payroll growth and will rein in the pace of tapering. However if payrolls are going to pick up it might be now as the negative seasonals are out of the way. We'll certainly know a bit more on Friday if there's anyone around to count and publish over the next few days. For the record DB is expecting a headline gain of 170k and an unemployment rate of 7.3%. Other important releases include Today’s Chicago PMI, tomorrow’s ISM, Wednesday’s ADP employment, and Thursday’s services ISM, jobless claims and factory orders. Chairman Bernanke is scheduled to speak on the topic ‘Community Banking’ on Wednesday. The Fed’s Stein, Dudley, Fisher and Kocherlakota will all be speaking on Friday.
In Europe, the ECB council meets this week which will be followed by Draghi’s usual press conference. There is also increasing focus on the potential for another LTRO. Key data releases for the week include today’s German retail sales, Italian CPI/PPI; tomorrow's final Euroarea manufacturing PMIs and Italian unemployment; Wednesday’s Spanish jobless data; and Thursday’s final In China, the official manufacturing PMI is scheduled tomorrow, followed by the official services PMI on Wednesday. China’s markets will be closed beginning Tuesday for a week long National Day holiday. The government will be announcing details of its Shanghai free trade zone before the holiday. In Japan, the BOJ will meet on Friday. Shinzo Abe will be holding a press conference where he may announce a change to sales taxes and details of a stimulus package. followed by Tankan manufacturing survey and Aug employment stats tomorrow.