Today Europe awakes to yet another Eurozone summit, one at which such topics as Greece, Spain, the banking union project or a economic/budgetary union will have to gain further traction, if not resolution. In fact Greece could hardly wait and has already launched it latest 24 hour strike against austerity [24]. The same Greece which demands a 2 year, €30 billion extension from Europe to comply with reform, a move which Europe has/has not agreed to as while the core have said yes to more time, all have refused to fund Greece with any more money. Alas the two are synonymous. As SocGen predicts unless there is some credible progress today, all the progress since the September ECB meeting, which has seen SPGB 10 Year yields decline from 690 bps to sub 550 bps, may simply drift away. And as everyone knows, there is never any progress at these meetings, except for lots of headlines, lots of promises (the Eurozone June summit's conclusions have yet to be implemented) and lots of bottom line profits by Belgian caterers. Elsewhere, Spain sold 3, 4 and 10 year bonds at declining yields on residual optimism from the pro forma bailed out country's paradoxical Investment Grade rating. In non-hopium based news, Spanish bad loans rose to a record 10.5% in August from 10.1% previously while the oldest bank in the world, Italy's Banka Monte dei Paschi was cut to junk status. All this is irrelevant though, as no negative news will ever matter again in a centrally-planned world. Finally the only real good news (at least until it is revised)came out of the UK, where retail sales posted a 0.4% increase on expectations of a 0.2% rise from -0.2%.
More on trading ranges and outlook from SocGen:
MARKET REVIEW - FOREX
EUR/USD 1.3088-1.3131 overnight range. Quiet in a narrow range overnight as we await EU summit headlines. The 1.3140 high keeps spot within reach of the 1.3172 high of September. Merkel speech also in focus. 1mth RR climb above -0.20.
USD/JPY 78.76-79.22 overnight range. Big push higher overnight with follow through buying linked to hope of further BoJ easing, government stimulus and China data. Resistance 79.40, the 200d ma. EUR/JPY approaching 103.85, the Sep high.
GBP/USD 1.6124-1.6159 overnight range. MPC minutes keep QE on the table for November meeting, but more polarised views make a split vote possible. Retail sales due this morning, but profit taking could be in the offing. Support 1.6104.
AUD/USD 1.0366-1.0397 overnight range. The surge through the 50d/200d ma leaves bulls contemplating further upside backed by China data and AUD buying for corporate tax purposes (payment due 22 Oct). GBP/AUD in corrective mood.
MARKET REVIEW - RATES
EU 10y swaps touched a 1.9070% high overnight, extending the move since Monday to 17bp. EU summit headlines and the Spanish auction will set the tone today. Post EU summit disappointment is not unusual and could see stronger receiving interest emerge. Support 1.80%. 10y swap spread tightens to 23bp, -6bp since Monday.
US 10y cash yield touched 1.80%, the 200d ma and swaps hit a 1.8625% high in Asia as equities push on. Busy data ahead features initial claims (correction from last week's drop to 339k?) and the Philly Fed. Support swaps at 1.7765%.
TO WATCH OUT FOR TODAY
Outlook
The question now is whether risk appetite will continue after the summit. Has everything really been pre-announced? If no new measure is presented, whether on Greece, Spain, the banking union project or a economic/budgetary union, risk-on strategies could quickly lose steam. Let's just hope that in this event the ongoing hope that Spain will ask for aid over the next few weeks will stem the decline of the EUR/USD and EUR swap rates. The EUR/USD will have to break the 1.28/1.3175 range for us to have better visibility. For 10Y EUR swap rates, the levels to follow stand at 1.97% and 1.66%, respectively.
Today the pickup in UK retail sales should add to the list of positive surprises published recently in the UK. Will the same be true of the USA? Initial claims and the Philly Fed will be all the more important as 10Y US swap rates are close to a resistance level at 1.82% (200DMA).
And a more comprehensive summary as always from DB's Jim Reid and team:
Overnight markets ticked marginally weaker post the Chinese GDP print, although most markets have recovered any initial losses to trade up on the day with the Nikkei (+1.8%), ASX200 (+0.9%) and Shanghai Composite (+1.1%) all higher. Asian and Aussie credit spreads are trading tighter, with the IG benchmarks 2bp and 6bp tighter respectively, helped by the back up in 10yr US treasury yields overnight (which added 10bps to close at 1.82%).
Recapping yesterday’s moves, European equities closed higher for the third consecutive day with the Stoxx 600 adding +0.47% to take the index to just 0.1% below year-to-date highs seen in mid-September, post the announcement of QE3. It was a similar story in the credit space, with Crossover gapping in 80bps over the last 5 trading sessions to close at 477bp. Fin Snr, Fin Sub and Main were also -33bp, -45bp and -16bp tighter over the same period.
Moving to the US, Financial stocks (+1.2%) were once again amongst the leaders, helped by better than expected results from Bank of New York Mellon and Bank of America Corp. BofA shares ended lower however, probably driven by revenue declines in FICC (down 1% qoq vs 7-31% increases at peers) and equities trading (-8% qoq). On the data front, US housing continues to surprise to the upside. September housing starts rose 15% mom to 872k (vs 770k/2.7% expected) after the prior month was revised up 8k (to 758k).
The robust increase in starts was matched by an 11.6% mom rise in building permits (vs 1.1% expected) which was driven mostly by a 20.3% gain in multi-family permits. The strength in both starts and permits was broad-based and follows the recent surge in homebuilders' sentiment and banks' housing lending figures. S&P’s Homebuilders index closed up 1.9% yesterday.
Spanish news aside, the European headlines were towards the negative side, though they were largely shrugged off in the rally. The FT published an article suggesting that plans to create a single Eurozone banking supervisor was “illegal” citing an internal paper from the EU Council’s top legal adviser. The article adds that it would be impossible to give the ECB bank supervision powers without changing EU treaties. Elsewhere Cyprus was downgraded to B from BB by S&P as the nation's creditworthiness has deteriorated "significantly" since the last downgrade in August as domestic political constraints prevented a timely aid deal. The German government downgraded its 2013 growth forecast to 1% (from a 1.6% forecast in April), saying that uncertainty about the ability for policymakers to curtail the crisis has resulted in companies postponing investment, the finance ministry said. Staying with Germany, a study published by German newspaper Frankfurter Allgemeine Zeitung indicated that only 40% of those who live in Germany are convinced the euro will still be around in 10 years' time, compared with 50% at the end of 2011. Also Bloomberg reported that Peugeot’s financing arm will be forced to seek a bailout from the French government in order to help rollover shortterm loans.
On a more positive note though, inspectors from the Troika have left Athens after making substantial progress on budget cut talks and reforms but without agreement on labour reforms, officials said on Wednesday (Reuters). The IMF's mission chief for Greece, Paul Thomsen, stated that the two sides had agreed on "most policy issues", with agreement on the rest expected soon. Troika inspectors will fly to the EU summit (starting today in Brussels).
Turning to the day ahead, it will be relatively quiet in terms of European data. In terms of US data, initial jobless claims and the October Philly Fed survey are due. Morgan Stanley reports Q3 earnings before the US market open, while Google, Microsoft and AMD report after markets close. All eyes will be on the EU leader’s summit with Spain and Greece being hot topics. DB are not expecting decisions on either.