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Futures Storm Higher On Hopes Can Will Shortly Be Kicked Once More
As reported previously, the latest meme surrounding the D.C. impasse is that Obama is suddenly willing to compromise on a short-term, supposedly six-week funding and debt ceiling extension, on the verge of his latest talks with republicans at the White House scheduled for this morning, as previously floated by the GOP. Throw some additional headlines such as "Ryan steps up to shape a deal" (in line with what we predicted yesterday) and "The ice breaks; fiscal talks set", by The Hill, and "GOP quietly backing away from Obamacare" from Politico, and one can see why futures are in breakneck soaring mode this morning, driven as usual by the two main JPY cross (USD and AUD), the first of which is less than 100 pips now away from being Stolpered out.
Confirming this view, in recapping the events in DC, DB's Jim Reid says there has been growing optimism over the last 12 hours that we may get a deal which will see a short-term increase in the debt ceiling. House Republicans haven’t yet decided how long an extension they would support and whether it will include any policy conditions. However Republican Paul Ryan, chairman of the House Budget Committee, outlined a plan yesterday to fellow conservatives to extend the debt limit for 4-6 weeks, paired with a framework for broader deficit-reduction talks. The greater the spending reduction the talks produced, the longer the next extension of the debt ceiling would be under Mr. Ryan's plan (WSJ). House Republicans are scheduled to meet at 10am today (local time) to discuss the proposals further and a small team of negotiators are due to meet with the president as well. The White House said the session isn't designed to be a negotiation, but the meeting may allow House Republicans to say they had a policy conversation with the president, which they have been saying is a condition of resolving the stalemate.
In the Senate, Democrats are reportedly open to a short term increase in the debt ceiling, but on the condition that any subsequent debt limit increase wouldn’t require agreement on healthcare policy, namely Obamacare. One can’t help thinking that a short-term agreement would only be a mildly constructive outcome, placing markets in limbo for several more weeks. Meanwhile the latest Gallup poll suggests that Democrats may be gaining the upper hand in the public relations game. The poll found that the favourability of the Republican Party has fallen to 28% (from 38% in September), which is the lowest reading since late 1998 when the Republicans voted to impeach Bill Clinton. The rating for Democrats stands at 43%, down a few points on the month.
So will a compromise deal finally emerge 7 days ahead of the first X-Date, or will a last minute snag once again derail the (non)-negotiations? We will know quite soon.
Market Re-Cap
In Early European trade equities are seen up across the board following positive sentiment stemming from reports from a congressional aide in the US that House Republican leaders are said to weigh a short-term debt measures and Democrats from the Senate are reportedly open to the idea of a short-term debt-cap bill. In terms of the best performing indices for the session the IBEX 35 and FTSE MIB lead the way with financials being the best performing sector amid the positive tone.
Looking ahead for the rest of the session there is the announcement of the BoE rate decision and APF Target, from the US we have release of US Initial Jobless and Continuing Claims and a US 30yr bond auction. Do note that due to the shutdown both import price data and the monthly budget statement have been postponed. We also have speeches from the ECB’s Draghi, the BOJ’s Kuroda, Fed’s Bullard, Tarullo and Williams
Overnight bulletin from Bloomberg and RanSquawk
- Late yesterday it was reported that House Republican leaders said to weigh a short-term debt measure while Senate Democrats are said to be open to a short-term debt-cap bill, according to a Congressional aide.
- USD outperforms most G-10 currencies as Republicans and Democrats showed openness to embracing a short-term deal to avoid default; GBP/USD stays offered before BOE rate decision/asset purchase target at 7:00am New York time; preview here
- The US Treasury and Fed are creating contingency plans should the US enter default, according to sources.
- Treasury Sec. Jack Lew testifies at 8am before Senate Finance Committee on debt limit
- Germany’s Greens are approaching today’s meeting with Chancellor Angela Merkel and her bloc looking for an excuse to abandon talks before they’ve begun
- Norwegian krone falls after Sept. inflation unexpectedly decelerates to 1.7% y/y vs median est. 2.2%; SEK slid against most G-10 counterparts after Sept. CPI and August industrial production also fell sort of estimates est.
- Draghi says critics of EUR underestimated region’s political commitment to the single currency; majority of economists in survey say next monetary policy move will be to unveil new liquidity measures rather than cut rates
- ECB and PBOC agree to establish a bilateral currency swap line, valid for 3 years with a maximum size of 350b yuan and EU45b
- Aussie fell after Australia Sept. employment change disappointed, 9.1K vs est. 15K; AUD/USD reached session low 0.9389 amid leverage accounts sell orders triggering stops, bounces during European session
- Japanese investors sold net JPY2.2t in overseas bonds in the week through Oct. 4, most since April 2001
- KRW rose against all major counterparts after South Korea’s central bank left its benchmark rate unchanged, as expected cut 2014 growth forecast to 3.8% from 4%; benchmark rate unchanged, as expected
- BoE October rate decision due at 1200BST/0600CDT, all analysts surveyed expect the Bank of England to keep the bank rate unchanged at 0.50% and the Asset Purchase Facility unchanged at GBP 375bln.
Asian Headlines
Chinese Premier Li said GDP expected to stay above 7.5% in first 3 quarters. Premier Li also said China is ready to explore signing ASEAN cooperation treaty.
IMF's Shinohara said it is difficult for the BoJ to achieve inflation target by 2015 and that Abenomics should boost JPY's value if successful.
EU & UK Headlines
Even though Eurodollar and Euribor curve have bull flattened in reaction to reports late yesterday that House Republican leaders said to weigh a short-term debt measure while Senate Democrats are said to be open to a short-term debt-cap bill, yields on US 3-Month T-Bills remained elevated.
Nevertheless, other credit market indicators such as USD FRA/OIS rate, signal that despite elevated yields, funding markets continue to operate normally.
French Industrial Production (Aug) M/M 0.2% vs. Exp. 0.6% (Prev. -0.6%)
French Manufacturing Production (Aug) M/M 0.3% vs. Exp. 0.6% (Prev. -0.7%, Rev. to -0.8%)
ECB's Draghi said US critics are wrong to predict Euro bond will fail and that critics underestimated Europe's commitment to the union.
US Headlines
As a reminder, late yesterday it was reported that House Republican leaders said to weigh a short-term debt measure while Senate Democrats are said to be open to a short-term debt-cap bill, according to a Congressional aide. The aide added that there was no decision on attaching conditions and Senate Democrats are said to not want budget deal as a condition.
The US Treasury and Fed are creating contingency plans should the US enter default, according to sources.
Officials are examining what options may be available to calm financial markets should a debt payment be missed.
Of note, Fidelity Investments, the largest manager of money market funds in the US, has said it no longer holds any debt that matures around the debt ceiling deadline.
Japan's Kokusai Asset says not expecting US Treasuries to default, haven't sold US bonds in its USD 14bln fund This morning it was reported that Hong Kong raised haircut on US T-Bills for margin cover.
Equities
Stocks traded higher in Europe, with tech and financials leading the move higher, as credit spreads tightened amid optimism that lawmakers in the US will finally break the stalemate to end the government shutdown.
The resurgence in risk appetite saw the Spanish IBEX-35 and Italian FTSE-MIB outperform their European counterparts, with smaller banking stocks posting gains of around 4%. Of note, after coming under selling pressure over the past couple of days following an announcement that it plans to cut 14% of its total workforce, which in turn prompted government officials to voice their concerns, Alcatel Lucent shares rebounded sharply and gained 3.5% amid touted bargain hunting.
After the closing bell on Wall Street yesterday, Chevron said that Q3 earnings expected to be lower than Q2. Co. shares down 1.6% in after-market hours.
FX
Despite the fact that default risk as indicated that 5y CDS rates declined in reaction to reports that US House of Representatives Republicans are considering signing on to a short-term increase in the government's borrowing authority to buy time for negotiations on broader policy measures, USTs remained under pressure, in turn supporting USD/JPY (interest rate differential flows) which matched October 3rd highs.Broad based EUR strength, which also saw EUR/GBP top the 21DMA line, ensured that even though GBP OIS rates traded higher ahead of the BoE policy rate announcement due at 1200BST/0600CDT, GBP/USD is seen little changed and in close to an intraday option expiry level at 1.5950.
The Brazilian Central Bank hiked the SELIC Rate to 9.50% from 9.00%, alongside expectations.
Commodities
Gold sales under the Central Bank Gold Agreement in the year to Sept. 26 were the lowest of any year since the first version of the pact came into force in 1999, data from the World Gold Council showed.
India's commerce ministry said gold imports by India tumbled last month after the world's biggest user restricted shipments and increased taxes.
Chinese September oil imports are likely to show an increase as refineries return to production after maintenance.
Chevron warns on Q3 earnings after refining earnings drop with the average output for July and August at 651,000bpd vs. 659,000 in Q2.
Freeport sees 2014 copper sales up nearly 10%.
Libya PM Al Zaidan has been taken by armed men from a revolutionary group, according to officials. However, reports made later by Libyan officials said that the PM is in good health and is being treated.
* * *
Deutsche's Jim Reid concludes the overnight recap
The initial reaction to the FOMC’s September meeting minutes suggested that markets had taken it to be a little more hawkish than expected. Indeed, in the moments immediately following the release, T-notes moved a few ticks lower, the USD index spiked 0.2% and gold fell about 0.4%. This was perhaps a kneejerk reaction to the text that said most participants judged that it would be appropriate to begin reducing the pace of asset purchases this year and to conclude QE in the middle of 2014. This hawkish interpretation was quickly pared back though, with some pointing to the more dovish elements of the minutes including signs that the Fed was concerned about the increase in rates on housing and its view of the “considerable risks surrounding fiscal policy”. On the flip side there were also some concerns that a delay in tapering could have significant implications for the effectiveness of Committee communications and commitment to forward guidance. Other than that, they confirmed to some extent that the September taper/no taper call was relatively close, but added little else. And it’s fair to say that the events in Washington of late have superseded the relevance of these minutes to some extent.
A big focus today will be on Treasury Secretary Jack Lew’s appearance before the Senate Finance Committee at 8.30am (ET). DB’s Joe LaVorgna notes that Lew’s initial October 17th Debt Ceiling date is a “soft” deadline. He argues it’s conceivable the Treasury could get to the end of the month before requiring a debt ceiling increase, however it wouldn’t be able to operate past October 31st because the Treasury needs to make a large (estimated at $24bn) Social Security payment on November 1st. The discussion will also likely cover what strategies the Treasury might employ to avoid a technical default if these “harder” dates are overrun. Overall we would expect his testimony to balance forcing politicians into a compromise while trying not to give the markets too many jitters that may be counterproductive medium-term. A difficult balance as we might need more of a market fright to accelerate us towards a long or short-term budget agreement.
Recapping the events in DC, there has been growing optimism over the last 12 hours that we may get a deal which will see a short-term increase in the debt ceiling. House Republicans haven’t yet decided how long an extension they would support and whether it will include any policy conditions. However Republican Paul Ryan, chairman of the House Budget Committee, outlined a plan yesterday to fellow conservatives to extend the debt limit for 4-6 weeks, paired with a framework for broader deficit-reduction talks. The greater the spending reduction the talks produced, the longer the next extension of the debt ceiling would be under Mr. Ryan's plan (WSJ). House Republicans are scheduled to meet at 10am today (local time) to discuss the proposals further and a small team of negotiators are due to meet with the president as well. The White House said the session isn't designed to be a negotiation, but the meeting may allow House Republicans to say they had a policy conversation with the president, which they have been saying is a condition of resolving the stalemate.
In the Senate, Democrats are reportedly open to a short term increase in the debt ceiling, but on the condition that any subsequent debt limit increase wouldn’t require agreement on healthcare policy, namely Obamacare. One can’t help thinking that a short-term agreement would only be a mildly constructive outcome, placing markets in limbo for several more weeks. Meanwhile the latest Gallup poll suggests that Democrats may be gaining the upper hand in the public relations game. The poll found that the favourability of the Republican Party has fallen to 28% (from 38% in September), which is the lowest reading since late 1998 when the Republicans voted to impeach Bill Clinton. The rating for Democrats stands at 43%, down a few points on the month.
Asian markets initially traded firmer on the back of the short term compromise debt limit extension reports. That sentiment has also helped the S&P 500 futures gain 0.4% this morning (to 1656). Sentiment is mixed across the region though with the Hang Seng (-0.8%) and Hang Seng China Enterprises index (- 1.1%) seeing sharp drops in morning trading. There has been market chatter of a small number of large sell orders on Hang Seng futures driving markets lower. Against this backdrop, the TOPIX is firmer (+0.7%) after machine order numbers for August were better than expected (5.4% MoM vs 2.5% expected).
USDJPY is up 0.4% to 97.8. Asian credit spreads are unchanged to a touch tighter overnight following an impressive week so far of primary issuance. Elsewhere as we type there are unconfirmed reports that the Libyan PM has been taken by armed men which is causing a slight spike in Brent (+0.2%). Pockets of market stress remain in the short term money market and there’s been a lot of focus on the T-bill maturing on October 17th (i.e. the date in which Treasury Lew says that the US will hit the debt ceiling). The October 17th bill increased in yield by 20bp yesterday to just under 0.5% and this wasn’t helped by reports that the largest money market fund manager in the US no longer holds any T-bills that mature in late October or early November (Associated Press). The FT added weight to those concerns saying that one or two repo dealers are now avoiding certain T-bills maturing in the next month as collateral for transactions.
In the longer end of the curve, 10yr yields added 3bp to 2.66% with yields trending upwards in the latter half of the US session as equities gained momentum. Indeed, the S&P 500 rebounded from an early low of -0.55% to close at +0.06% for the day. There was very little on the data front except for German industrial production which rose by 1.4% mom in August (consensus +1.0%), reversing the 1.1% decline in July. UK industrial production fell 1.1% in July vs expectations of +0.4%. While the US data blackout accumulates, an ex-Commissioner for the Bureau of Labor Statistics warned yesterday that the integrity of employment data could be compromised the longer the shutdown drags on. Workers at the Census Bureau this month would normally begin canvassing households, starting on Oct. 13, to ask people if they were employed during the previous week. The ex-commissioner commented that “If you collect the information too late, you know the information is not going to be reliable”.
Looking at the day ahead, US Treasury Secretary Jack Lew will testify before the Senate Finance Committee on the debt limit at 8.30 am local time, or around 1.30pm London. The discourse between the White House and House Republicans will be closely watched today for any sign that they are heading to a short term compromise, or otherwise. French and Italian production numbers for August are the main data releases today in Europe. Across the Atlantic initial jobless claims will be released today.
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But but but Deutsche bank said.....
Are you a deer in the headlights?
Kick the damn thing!!!
Taking their cue from Obama's press conference, Cantor and Ryan have started their endrun and in 24 hours have virtually erased any talk of Obmacare from the discussion with help from the MSM and the WH
Tea Party has just entered the ER on life support having once again been outfoxed by the GOP leadership, and speaking of leadership Old Boner has also been hung out to dry
Ryan and Cantor the evil twins
g-20 is in town on a meeting ...something to ponder
Beats last time when he said he didn't want to do no short term stuff, said it made the process look wishy washy.
Here...Let me put on my SURPRIZED face!! Been saying it for days now. No one in Congress has the nads to handle what the ms media dishes out. Gold and stock indexes told the story, wall street and the fed kept the market on a tight leach, the whole time, right before our eyes - While the world held its breathe!! BWAHAHAAHAHAHAHA THIS IS THE MATRIX!!!
Cave cave fucking cave...Boehner is caving again. Hope he enjoys his retirement
See, it IS "some kind of damned game." Lied to again.
Ha Deutsche bank getting some love on here today. Funny...yesterday they say the market will have to crash and the market just rips higher, and I get junked for pointing out the scum that they are. Oh well....
Gold, bitchez!
The kabuki is wrapping up this episode...let's get on with the Yellin and screamin'!
It's all Bullshit!!!!
But 10 year Treasury yield says NOT THIS TIME!
http://www.marketwatch.com/investing/bond/10_year
Do you see the Writing On The Wall (Street) now:
"The US Treasury and Fed are creating contingency plans should the US enter default, according to sources.
Officials are examining what options may be available to calm financial markets should a debt payment be missed."
Well it's not what I would call optimal conditions....but we rarely get that.
Once more into the breach......just try not to look nervous.
I'm looking forward to it actually!
I've never heard of the markets going against the President of the United States before......so far so good!
That's gotta be really chapping his ass.
The 10yr treasury is saying risk on bitches.
The 10 year is saying that the Fed meeting minutes sounded a lot more hawkish than the decision to keep QE going would have implied.
Keep QE going, talk it back with rhetoric. Same game they've been playing since June.
So, yes. Risk on.
Keep QE going...talk it back....
well said
Italy and Spain on full retard both up 2% to new 2 year highs
1y Italy trades below 1% even with 40% youth unemploment and 2 trillion Euro debt
Such hope for the future!
"What luck for rulers that men do not think."
Adolf Hitler
Jubber,
Its all about 10YRS YIELD and 2/10 and 2/5 Spreads.
Meanwhile hedge funds, generalistics and L/O Funds not sell Spanish or italian bonds....The market will suffer EUROLIMBO
So how much time this will last? Japanese Mutual Funds are the key.
Imho we have tested a super top in EUROPE (EUROSTOXX) and we will drop hardly 10-15% during last 4-6 months. Cos the RECOVERY ITS COMPLETLY FALSE; ARTIFICIAL AND MASS MEDIA PROMOTED.
REal THING, AS U HAVE MENTIONED iS PIGGS are losing deposits, no new long term jobs, real estate prices in limbo, cos banks not sells stockage, so real deals, ....ALL IS A FREAKING FARCE, and the divergence between REAL ECONOMY , aka, SPAIN, vS FINANCIAL or IBEX (aka WallStreet) its so aBERRANT.
PMI data are all FALSE and manipulated, cooked. Honestly...NO NEW CAR SALES; no NEW PRODUCTION, LOWER AIRFLIGHTS THAN EXPECTED, SUMMER SEASON HAS ENDED IN SPAIN IN AUGUST¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡ NO PEOPLE HAS AGAIN JOBS'¡¡¡¡¡¡
So HOW THE HELL SPAIN GONNA PAY ANY KIND OF INTEREST (DEBT SERVICE)????????? ITS IMPOSSIBLE....I CANT UNDERSTAND HOWS POSSIBLE THAT BIG HEDGE FUNDS DONT ATTACK AGAIN THIS ZOMBIE CALLED SPAIN.
SPAIN IS THE KEY TO BREAK OUT AND SPILL OVER THE EUROZONE.
SPAIN IS THE MAGINOT LINE
Im Spanish i know my market, the real economy and the financial one. I dont want the euro more in Spain, i dont want to be German Slave till end of days.
and Remember CATALONIA IS IN DEFAULT and WILL SPLIT FOR SPAIN In MONTHS.
Its like they want to say BUY BUY ,THIS IS HEIDI WORLD. BE CAREFUL or the WOLF WILL EAT ALL OF US.
CONCLUSION: SELL ALL LONG EUROPEAN STOCKS, ALL ( 100%) and LOAD SHORTS FOR A 10-15% drop.
Money will flow again to GOLD and BONDS.
Im praying for more debt, more banker wars and more aid to Israel.........
(sorry, I thought this was the comment section for ADL.com)
So its buy the fucking dip time again. right?
That was your dip. Blink and you missed it.
They are eating us a finger and a toe at a time and will soon be starting on the major limbs, but we are thankful as we still have our health, right?
That will be 12 thousand dollars.....Justice Roberts says you gotta pay it!
Will we have a health tax? We already have wealth redistribution so I assume we will have the same in health. The healthy will be forced to pay for the care of the sick, because for those who much has been given, much is required. Its not like the sick are going to be earning much of anything to tax, right?
The sad fact is that this should really be seen as extremely BAD news if they are kicking the can and not sorting things out.
Sad for our children's children's children's children's children's children's children's children!
And the more they don't sort it out, the more children's children you can add to that
The future is someone else's problem. This is about ME!
This whole show is a scam, pure and simple...
Yup, keep kicking it down the road... until... KABOOOOM!!!
It's a WORLD OF DEBT!!! See the music video "WORLD OF DEBT":
http://www.youtube.com/watch?v=99xsqxzJnXs
SHORT SPANISH BANKS.
ITs all a farce,
We have our covered bonds close to default,
Our Real Estate books are completly cooked.
Honestly Spanish banks must be close to 0.3-0.4 p/bv
And Remember DEBT HAIRCUTS TO BE APPLIED in SPANISH COMUNIDADES AUTONOMAS DEBT CATALONIA IS IN FREAKING DEFAULT, LIKE ANDALUCIA O C.VALENCIANA
DONT HOLD ANY SPANISH AND SUBGOVERNMENT BOND
"Draghi says critics of EUR underestimated region’s political commitment to the single currency"
Draghi hides behind the "political commitment" meme. which is true. nevertheless, the intellectually honest reply to the critics of the EUR would imho be: "why not?" followed by "ah, you want us to devalue, devalue, devalue", followed by "possibly you made the wrong bet, eh?"
fact: even in Greece, which following the current meme is being tortured by the Troika, a solid supermajority of citizens don't want to go the devaluation path. explain this
right or wrong imo the majority of americans blame boehner for this latest debacle
The one person keeping the US from financial ruin.....you might consider praying for him.
I think it's on record I can't stand the guy.....but I like the others even less right now.
praying? you're kidding, right?
Did you have a better idea?
Yes the can will get kicked. That is the inevitable answer, the fun part is this 2 ring circus that plays out.
Gaps up fail fuckers.
Too soon. Congress is still daytrading this with their banker buddies. Shortly after open, after they have sold, they will throw cold water on it again. They have weeks of easy money to make jacking this around.
of course, once fucking again, these assholes are going to fucking cave.
god for fucking bid the markets continued to tank, lets just keep fucking pushing things off a few weeks/months every fucking time, that will really get thing solved.
this has nothing to do with time, this has to do with making sure markets dont collapse and nothing more. this is not to help the american people, its for the fucking bankers on wall st, we need to make sure everything is safe and secured.
i guess anything to push markets higher.
Ryan and Cantor are pro bailout girly men
Should be a good shorting opportunity around S&P 1680-85. Read any article interviewing Republican reps and they all want different things. GOP leadership is underestimating how angry this will make many. Should get really messy again, including a potential leadership battle