Overnight Sentiment: More Printing; More European Catch 22s
Those who expected a major response following the surprising, and "preemptive" easing by the Bank of Japan which has now joined the freely CTRL-Ping club of central banks, and went to bed looking for a major pop in risk this morning will be disappointed. The reason is that with every passing day that Spain does not request a bailout, all those who bought Spanish bonds on the assumption that Spain will request a bailout look dumber and dumber (a dynamic we explained nearly two months ago). As a result, the EURUSD has been dragging ever lower, and is now playing with 1.30 support. Providing no additional clarity was Spanish deputy PM Soraya Saenz de Santamaria who said Spain will decide if and when to trigger an ECB bailout once all details have been analyzed. Well the details have been more than analyzed, and Spain has been more than happy to receive the benefits of its bailout, it has yet to trigger the cause. Ironically in a Barclays study,over 78% of investors see Spain requesting a bailout by year end (even though as we explained over the weekend Spain really has to do this ahead of its major cash drawing bond redemption schedule in October when it may well run out of cash). And so, just like the US Fiscal Ceiling, the global markets are expecting some Catchy 22 deus ex machina, where traders can get their cake and politicians can eat it too. Alas, there never is such a thing as a free lunch. And what is making the much needed outcome even less probable is that Spanish bonds this morning are actually trading tighter once again making a bailout less than likely. The Spanish zombie has left its grave and is now romping through the neighborhood unsupervised.
As for the ever more frequent central bank easings, such as that from the BOJ last night, the biggest joke is that in 2-3 months when every central bank has eased "to infinity and beyond" and has pre-committed to destroy its currency ala Chairsatan, the world will be right back where it was before the Fed's QE3 announcement! Ah, the joys of living in a circular, relativistic Keynesian world, where if everyone destroys their currency nobody destroyed their currency. Expect the market to realize this in 4-6 weeks, and to further realize that global debasement can only occur relative to other undilutable benchmarks. Such as crude. And gold.
For a run through of the other overnight events, we hand it over to DB's Jim Reid:
Taking a closer look at the overnight session Asian equity markets are mostly higher as we go to print led by strong gains in the Nikkei (+1.6%) and the Hang Seng (+1.1%). Chinese equities are up for the first time this week but the Shanghai Composite (+0.1%) is still lagging the broader moves in Asia. The S&P 500 Futures is up +0.3% as we type. Sentiment in China was perhaps helped by news that the government will push for 15 major capital market reforms during the current 5-year plan and a smaller-than-expected FDI contraction in August (-1.4% yoy v -5.8%).
On the row between Japan and China, Fitch noted that major Japanese auto and technology manufacturers may come under pressure if tensions escalate, naming Sharp and Nissan amongst companies with the highest revenue exposure. A UK Telegraph article reported that a senior advisor to the Chinese government has called for an attack on the Japanese bond market given its position as the biggest creditor of Japan ($230bn of bonds)
Turning to Europe, Spain's deputy PM yesterday said that the government will study seeking a rescue to bring down its borrowing costs if the conditions imposed are acceptable. She added that funding at current levels is “like throwing money out of the window”. Spanish 10yr yields closed at 5.84% finishing 8bp lower on the day, helped by a firm 12-month and 18-month T-bill auction. Elsewhere in Europe, the German ZEW poll of economic sentiment rose to -18.2 from -25.5 in August, breaking a run of four monthly declines, probably reflecting the actions of the ECB in recent weeks. Greece’s negotiations with the Troika are expected to drag on until Sunday according to the finance minister. IIF’s Charles Dallara said Athens should get cheaper rates on its EU130bn aid deal and at least two more years from the EU and IMF to meet its targets. But better terms could only come after the government delivers on his commitments to fiscal reform (Reuters).
Looking at the day ahead, the focus will be on US housing data with home sales, permits and starts due. DB expects the August data on housing starts and permits, as well as existing home sales to show continued evidence of firming activity today. The BoE will also release minutes from its last meeting.