Overnight sentiment is decidedly negative, following the across the board cut of growth forecasts by the IMF late yesterday. The only bright light was the PBOC dumping 265 billion yuan ($42.1 billion) in reverse repos in an open-market operation (a liquidity adding operation) whose only purpose was to roll the massive reverse repo from before the Golden Week. The resulting 2% jump in the Shanghai Composite came as traders expect an imminent rate cut by the PBOC. The irony of course is that as long as Reverse Repos are the liquification instrument of choice, the local central bank will do nothing else in an economy which is once again overheating in several industries, the most important of which continues to be housing. Furthermore, as long as the spectre of a 15% surge in pork prices is over the horizon, the PBOC will do nothing. Period. Elsewhere, as BBG summarizes, FX is mostly modestly lower with the AUD outperforming on rising iron ore price. Metals mostly modestly lower despite the crippling South African strike which has now migrated to catch iron ore mines as well. Treasury yields moderately lower, partly in catch-up after yesterday’s holiday. Bund yields modestly higher sovereign-to German yield spreads mixed with mostly modest changes. Few if any macro economic news today.
For the balance of overnight's events, here is DB's Jim Reid:
Recapping yesterday’s moves, the Euro Stoxx 600 opened 1% lower yesterday and closed at the same level as a weak Asian session extended into European markets. The ECOFIN meeting began with Eurogroup President Jean-Claude Juncker officially launching the ESM, describing the event as a “historical milestone in shaping the future of the European monetary union”. The EU’s Ollie Rehn was a bit more restrained, telling reporters that “Nobody is in any party mood but I am less pessimistic for the future of the Eurozone than I was, say, in Spring” (WSJ). Overnight, the ESM was assigned Aaa (negative outlook) and AAA (stable outlook) ratings by Moody’s and Fitch respectively. Moody’s negative outlook reflects the fact that all but one of the ESM’s Aaa-rated capital contributors currently have a negative outlook on their own ratings (the exception is Finland who’s capital contribution is 1.8%).
Speaking at the ECOFIN meeting, Germany’s finance minister reiterated his position on a potential Spanish bailout saying that "Spain needs no aid programme, Spain is doing everything necessary, in fiscal policy, in structural reforms". The comments were echoed by Juncker who added that 'to a large extent I'm satisfied with the fiscal consolidation measures taken so far by the Spanish government". The news flow was less positive on Greece, with Juncker acknowledging that a decision in October may not happen, although he praised “the willingness of coalition parties in Greece to undertake whatever will have to undertaken in order to respond to our wishes”. Luxembourg’s Finance Minister, Luc Frieden reiterated "we want to keep Greece in the euro zone" and said "Greece should be given more time, if that doesn't take too much money" (Dow Jones). Meanwhile, Austria’s finance minister Maria Fekter told reporters that “We expect a request from Cyprus soon, and Slovenia also has big problems” (WSJ).
It was relatively quiet on the data front. German exports (+5.8%yoy) increased more than imports (+0.4%yoy) in August, leading to a fall in the trade balance to EUR16.3bn. According to DB's German economists, the rebalancing within the euro area is progressing, with Germany's exports to the EMU (down 3ppt to 33.7%) declining whereas imports are higher (up 7ppt to 42.7%). German industrial production recorded a 0.5% mom fall in August, slightly better than expected (-0.8%).
There were some encouraging signs that credit markets in the periphery are continuing to open up with Italian bank Intesa Sanpaolo and utility Enel Spa the latest issuers to tap bond markets. Strong demand was reported for both deals. Meanwhile, the South African Rand continued to sell off, losing 1.3% yesterday following news that the country’s local government workers union will call a strike in the next few days, adding to labour unrest in the mining sector. The rand has lost 6% this month alone.
Across the Atlantic, US equities closed 0.3% lower in holiday trading. DB’s David Geisker notes that equity markets have traded poorly on Mondays, with equities down 4% year to date and over 90 pct of Mondays seeing declines in recent months. Tuesday trading, in contrast, has seen stocks rally almost 5% in 2012. We’ll see whether the trend continues today. On the political side, Bloomberg is reporting that Mitt Romney is now leading President Obama by 4 percentage points (49% vs 45%) in a Pew Research Center poll taken following the October 3rd presidential debate. A Pew poll taken last month had Obama leading by 8 points.
In other headlines, the IMF cut its global growth forecasts overnight, in a move that was previously flagged by IMF Managing Director Christine Lagarde. For 2012 and 2013, the IMF downgraded global GDP growth to 3.3% and 3.6% respectively, from 3.5% and 2.9% previously. The IMF’s report had a decidedly bearish tone, noting that there is an “alarmingly high” risk of a more pronounced slowdown, with a one in six chance of global growth slipping below 2%.
One of the largest 2013 growth downgrades was for Spain, where the IMF expects a contraction of 1.3% (from -0.7% previously) which is weaker than the Spanish government’s budget assumption of -0.5%. The ECB’s Coeure said that the establishment of a banking union will be a “game changer”, and expressed confidence that a single supervisory mechanism would be operational "in early 2013". On the topic of a banking union, Bundesbank President Jens Weidman, speaking Dusseldorf, said that a banking union must allow for bail-in provisions and adequate risk weightings should be applied to government bonds. He also reiterated that a banking union should not be used as a means to share “legacy balance sheet burdens”.
Turning to the day ahead, Merkel will be making a six-hour visit to Athens today to meet with Greek PM (meeting is scheduled for 10am London) in what is being seen as an expression of support for the Greek government’s reform efforts. According to the kathimerini, the Greek PM is aiming to secure concessions to the austerity package currently being negotiated with the troika. The same newspaper is reporting that some 7000 police officers will be on duty with a number of Greek unions organising protests in the capital. In terms of data, we get trade data for the UK, France and Spain. In the US, Alcoa will be first off the blocks today with Q3 earnings, followed shortly by earnings from Chevron.