If mere hope of an "imminent" deal starting on Thursday and continuing through Monday, with no actual deal but who cares about details, was enough to push the DJIA up by 600 points, then all it would take to set a new record market high today, is for another day to pass - one day before the October 17 X-Date when one Senator can filibuster the US through the deadline on their own, and when the House still has to have a voice on what the Senate has been doing - without an actual debt deal. After all, the market is so "centrally-planned" all that is needed is knowledge that Bernanke will get to work, and is getting to work to the tune of $85 billion a month, mixed in with some hope. And with today's "market for idiots" facilitating POMO of over $5 billion which guarantees a green close, all that is needed is a complete failure in talks for the SPX to go limit up on even more hopes things will be fine any second now... if not right now.
In actual economic news (remember those?) The German ZEW current conditions index dropped from 30.6 to 29.7, pushing the EURUSD lower by nearly 100 pips. But don't worry: Future expectations, i.e. "hope", soared from 49.6 to 52.8, the highest since April 2010. See the pattern here?
Going back to the US where we actually may get macro data today for the first time in days, in the form of the NY Fed and Factory Orders, which will be bullish no matter what the actual print, the one thing to note is that Citigroup (which will release about $1 billion in reserves), Coke and J&J are all reporting, and the only thing that can send stocks to a true breakout record high as opposed to the boring old plain record, is if all three miss epically. At least the market will be able to stop pretending it cares about any actual fundamentals, and that only the Fed's liquidity tsunami, pardon "earnings multiple" is what matters.
US Government Shutdown Update:
US Senate majority leader Reid commented said he and Republican McConnell have made "tremendous progress" towards debt limit and government funding deal, but we are not there yet. Reid said "that perhaps [today] will be a bright day". According to sources, the leaders are discussing raising the debt ceiling through to mid-February, and the government would reopen through to the middle of January.
US President Obama raised concerns in a phone call with Senate Minority Leader Mitch McConnell about Republican efforts to limit the Treasury Department's flexibility in managing the debt ceiling.
Senate negotiators were said to make progress on deal and that a White House meeting was deemed not necessary. There were comments from US Senator Barrasso that Senate Republicans will meet tomorrow at 1100EDT.
With risk appetite buoyed by comments from US Senate majority leader Reid that he and Rep. McConnell have made "tremendous progress" towards a debt limit and government funding deal, equities traded in the green across the board. Markets were also lifted by strong, European macro-economic data in the form of ZEW from Germany and the Eurozone with both sentiment figures beating expectations. Today also saw the release of UK CPI, which was higher than expected (2.7% vs Exp. 2.6% Y/Y), but market reaction was somewhat muted given the focus on the US.
Indicators of increased risk appetite can be seen across other asset classes, in FX USD/JPY reversed overnight losses to trade flat, but crucially above the 100DMA line, while EUR/CHF is trading higher by over 45 pips supported by talk of European names buying with stops tripped above 0.9130. At the same time the USD-index has seen gains today (+0.25%), which in turn weighed on EUR and GBP pairs, technical indicators however, show the USD-index 100DMA has crossed the 200DMA to the downside illustrating a longer term downward trend. Elsewhere, in fixed income products bund futures remain lower with the overall stock strength emanating from the progression in US debt ceiling talks and with ZEW coming in at the highest reading since April 2010. Worth noting in terms of notable stock movers, Burberry shares fell over 5% after it was reported that the CEO is to leave the company to join Apple.
Looking ahead US Empire Manufacturing is the main data release for the rest of the session while a number of large cap companies' report earnings with the likes of Citigroup, JNJ, Intel and Yahoo to come. Markets, of course, will also continue to keep a close eye on any developments from Washington.
Overnight bulletin from Bloomberg and RanSquawk
- Treasuries fall as Senate leaders are poised to reach an agreement as early as today to end fiscal standoff; now must sell the plan to lawmakers before U.S. borrowing authority runs out this week.
- US Senate majority leader Reid commented said he and Republican McConnell have made "tremendous progress" towards debt limit and government funding deal.
- German ZEW Survey (Economic Sentiment) (Oct) M/M 52.8 vs. Exp. 49.6 (Prev. 49.6); highest since April 2010.
- US participants will pay close attention the earnings releases from a number of large cap companies, including Johnson&Johnson, Coca-Cola, Citigroup, Intel, and Yahoo!.
- Treasury bills maturing Oct. 31 yielding 32bps; touched 37bps
- Oct. 10; Oct. 17-24, Nov. 7 bills yielding 21bps-26bps
- EUR/USD plunged as the ZEW gauge of current conditions fell to 29.7 in Oct. from 30.6 in Sept., lower than forecast; future expectations rose to 52.8 from 49.6
- Merkel moved toward picking her third-term ally the opposition Social Democrats cited common ground after eight hours of coalition talks
- Germany’s power grid operators boosted the surcharge consumers pay for renewable energy by 18%, adding to pressure on Merkel to act against rising electricity bills
- Australia’s central bank said interest-rate reductions are affecting the nation’s economy, while retaining the option to loosen policy further to spur growth, minutes of the Oct. 1 meeting released today showed
- Abe marked the opening of Japan’s parliament with a pledge to create a virtuous circle of higher employment and spending and to boost Japan’s role in global security
- IG volumes on MarketAxess Holdings Inc.’s electronic system are on pace to exceed $400b in 2013 after surging 45% to $44b in September from a year earlier, equal to 14.3% of all market activity, including business done over phone, vs 12.2% last year
- China and the U.K. will introduce direct trading between the yuan and the pound, helping London steal a march on Frankfurt and Paris to become Europe’s hub for the Chinese currency
- EU finance ministers grappled with how to protect the credibility of next year’s bank reviews as the countdown began for the ECB to assume oversight over euro-area lenders
- Sovereign yields mostly higher, peripheral spreads narrow. Nikkei rises 0.3%, leading most Asian markets higher. European stocks, S&P 500 futures gain. WTI crude, gold and copper fall
S&P said China economic slowdown is to weaken companies' credit whearas Nomura commented that China likely to tighten policy after November plenum. The Chinese Academy of Social Sciences commented that China 2013 GDP may grow 7.7%.
EU & UK Headlines
German ZEW Survey (Economic Sentiment) (Oct) M/M 52.8 vs. Exp. 49.6 (Prev. 49.6) - highest since April 2010.
German ZEW Survey (Current Situation) (Oct) M/M 29.7 vs. Exp. 31.3 (Prev. 30.6)
UK CPI (Sep) Y/Y 2.7% vs. Exp. 2.6% (Prev. 2.7%)
UK CPI Core (Sep) Y/Y 2.2% vs. Exp. 2.0% (Prev. 2.0%)
UK RPI (Sep) Y/Y 3.2% vs. Exp. 3.2% (Prev. 3.3%)
UK ONS House Prices (Aug) Y/Y 3.8% vs. Exp. 3.4% (Prev. 3.3%) - UK avg. house-price index rises to record high of 185.5.
Eurogroup's Dijsselbloem said the Irish and Spanish budget outlook has improved & the Eurogroup is to discuss Irish and Spanish exit in November.
Italy's 2014 budget targets budget deficit of 2.5% of GDP according to a draft. The draft said Italy targets deficit of 1.5% of GDP in 2015 and near zero in 2016 and Italy's 2014 budget seeks solidarity surcharge on high cost pensions.
EU finance ministers are expected to give final approval for a new banking supervisor for the Euro zone today, according to officials.
S&P said Yellen's nomination is near-to-intermediate term positive and that Yellen is not as dovish as people think. Citigroup and State Street are said to discuss ways to impose limits on client's use of short term US T-bills as collateral for loans and trades according to people familiar with the situation.
Equities trade with significant gains in the European morning as markets are lifted by the potential of an US government agreement in the debt ceiling and budget debate. Gains were led by basic materials and financials, which benefited from credit spread tightening as market participants reduced risk premia following the developments over in the US overnight. In terms of notable stock movers, Burberry shares fell sharply after it was reported that the company's CEO is to step down in mid-2014 to take up a new position with Apple.
US participants will pay close attention the earnings releases from a number of large cap companies both before and after Wall St trade.
The USD-index has seen strength in the European morning, trading higher by 0.28%, with the USD/JPY trading above the 100DMA line after paring losses seen overnight. EUR/CHF is trading higher by over 45 pips supported by talk of European names buying with stops tripped above 0.9130. The USD strength has been broad based and weighed on EUR and GBP pairs, technical indicators however, show the USD-index 100DMA has crossed the 200DMA to the downside illustrating a longer term downward trend.
Overnight AUD strengthened following the RBA minutes where the central bank didn’t close off chances of a rate cut but said that a cut was not imminent, which suggests the RBA is unlikely to cut at the November meeting.
SPDR Gold Trust said its holdings fell 0.21% to 889.13 tonnes on Monday from 890.98 tonnes on Friday.
China August gold output at 37.978 tonnes, according to the China Gold Association.
Heading into the North American open both precious metals and energy see losses with gold printing a three month low as a result of USD strength. Separately, Macquarie Q4 brent target falls USD 2 to USD 108 and keeps its 2014 forecast as USD 112.
We conclude as usual, with Jim Reid's narrative of the key overnight events
As we now roll past two weeks of the US government shutdown, optimism is back that we're on the brink of a deal. Indeed such hope has been enough to send the S&P 500 (+0.41%) to within 16points, or less than 1%, of its prior record of 1725 set on the 18th of September. Latest reports suggest that Senate leaders Harry Reid and Mitch McConnell are closing in on a bipartisan agreement which is likely continuing to be negotiated as we type. Details of the plan have been slow to emerge, but are reported to include a bipartisan agreement to reopen government until mid-January next year and to extend the debt ceiling until mid-February. This will allow some time for budget talks before a new round of sequestration budget cuts take effect in January, according to the Washington Post. Under the current budget law, spending for 2014 will automatically be reduced by $19bn to $967bn in mid-January. Democrats are pushing for a stop to sequestration and bringing budgeted spending to $1.06 trillion. The setting up of a bicameral budget conference, which will report to Congress mid December, is also on the cards.
Significantly, the broad elements of Obamacare are not expected to be changed, and Senator Reid commented that Democrats have not made any significant concessions in negotiations thus far. A delay or removal of medical device taxes is not part of the Reid/McConnell proposal, but a change in the verification of income claims for people applying for insurance subsidies has apparently been agreed by both sides. Republicans are also requesting that there be limits placed on the “extraordinary measures” that can be used by Treasury in the event the US reaches the proposed mid-February debt ceiling deadline.
Risk assets rallied strongly during the US session yesterday as both Reid and McConnell expressed optimism that a deal was within striking distance. There was even some expectations that a deal could be struck before a meeting between Congressional leaders and President Obama which was originally scheduled for 3pm USEST Monday. This meeting was later postponed to allow Reid and McConnell to “continue making important progress”, according to a White House statement.
Looking at overnight markets, Asian equities are up about half a percent to a percent across the region. US 10yr treasury yields have reopened 3bp higher at 2.715% after being closed for trading yesterday. The better risk sentiment is seeing S&P 500 futures add 0.10% although this is down from early highs of +0.3%, after reports that the White House are concerned that Republican efforts to limit Treasury’s use of “extraordinary measures” will limit the Treasury’s flexibility.
So while markets are increasingly pricing in a positive outcome to the Senate talks, it’s important to keep in mind that Reid and McConnell have had a chequered history of late. Though the two Senate leaders were instrumental in resolving the 2011 debt ceiling stalemate, the relationship between the two has been described as frosty at times. Bloomberg notes that the two have spent much of this year clashing over Obama’s second term nominees, spending and tax reforms amongst other issues, with some disputes being acrimonious enough that other senators has to step in to resolve them. DB’s Frank Kelly believes that if a bipartisan deal comes out of the Senate, it would pass with a strong bipartisan vote. What remains unknown is whether Senators Cruz or Lee might try to delay the final vote to later this week, after the default date, by using parliamentary tactics to slow the process down. House Majority Leader Eric Cantor wouldn't comment on the Senate negotiations, but a meeting of House Republicans has been called for Tuesday morning USEST “to discuss a way forward”.
In Europe, the first day of the Eurogroup/ECOFIN meeting passed with several headlines of note. The EU’s Ollie Rehn described the Irish and Spanish programmes as “on track for a successful conclusion” and there was talk that Ireland would be able to exit its programme by the end of the year, possibly without a precautionary credit line. 10yr Irish government bonds were quoted at around 3.67% yesterday (-3bp). There was brief discussion about extra funding needs for Greece, but the amounts being suggested were relatively low, at less than EUR10bn. Finally, there was further talk about the need to shore up European bank capital ahead of the ECB’s asset quality review. This perhaps explained some of the underperformance of the European iTraxx subordinated financials index, which was unchanged yesterday, versus a 1.5bp and 5bp tightening in the broader European iTraxx and Crossover indices respectively.
Coming back to the US, the bank earnings season rolls on today with Citigroup’s Q3 results expected prior to the opening bell. Bloomberg consensus is expecting adjusted EPS of $1.04/share on revenues of $18.7bn – these estimates have come down markedly over the last couple of months and are about 2% below Q3 2012’s actual results. Markets will be closely watching the momentum in the mortgage businesses, particularly after the slowdown in refinancing volumes and cost cuts reported in the JPM and Wells Fargo results late last week. There will also be plenty of focus on trends in the fixed income business where some analysts expect a 20% YoY drop in revenues generally across the US bulge brackets. Some reports (FT) have suggested that Citigroup has been disproportionately affected by the volatility in emerging fixed income markets.
Across the rest of the day ahead, investors will be waiting in anticipation of any deal or otherwise from the ongoing Senate talks. Also interesting to watch is the reaction from House Republicans after their huddle in the morning. The key data releases today are the German ZEW survey, UK CPI, US Empire manufacturing and US factory orders. Apart from Citigroup, other large corporates reporting results today include Coca-Cola and Johnson & Johnson before the US market open, followed by tech giants Yahoo! Inc and Intel after the US close. Chairman Bernanke speaks at the Mexico Central Bank, though it does not appear that he will be taking Q&A.
Source: RanSquawk, Deutsche Bank, Bloomberg