The German elections came and went, with Merkel initially said to have an absolute majority, but in the end being forced to design a Grand Coalition. Still, the punditry has been tripping over each other desperate to make that result (or any other result) positive for Europe , which despite now paving the way for policy continuity, together with the latest round of less than impressive Eurozone PMIs (following the strongest China HSBC PMI in 6 months) failed to inspire appetite for risk in Europe this morning where stocks have traded mixed. What is amusing is that everyone expected, the second Merkel gets reelected things in Europe would start going pump in the night - sure enough, the Italian FTSE-MIB is underperforming in early trade amid reports that Italy's economy minister Saccomanni threatened to step down if the country does not stick to its pledges it made to the European Commission. However to a certain degree, the negative sentiment towards Italy was offset by €4.8bln of coupon payments and €24.1bln of redemptions from Italy which is eligible for reinvestment this week. With a second Greek 2-day strike in one week scheduled for Tuesday and Wednesday [29], look for Europe's catalytic event to unclog, now that the German political picture is set, culminating with the 3rd (and 4th) Greek bailouts and probably more: after all Europe now needs a lower EURUSD (recall Adidas' warning), and that usually means a localized crisis.
Overnight in Asia, the September HSBC flash manufacturing PMI numbers for China printed a 6-month high, while the new export orders component rose to its highest level in 10-months. Though overall trade volumes were light given the absence of market participants from Japan, where markets remained closed for Autumnal Equinox holiday. Going forward, given how markets reacted to Fed’s Bullard’s comments on Friday where he suggested the September decision not to taper was a “borderline” decision, today’s speeches from Fed’s Lockhart, Dudley and Fisher will be closely watched. Other B-grade economic data on the docket is the Chicago Fed and the Markit US PMI, both largely ignored.
Overnight event bulletin from RanSquawk and Bloomberg:
- Italy's economy minister Saccomanni is ready to step down if the country does not stick to its pledges it made to the European Commission.
- Treasuries 5Y and longer post modest declines before speeches by Dudley and Fisher (FOMC voters next year) and $97b note auctions begin tomorrow with $33b 2Y notes.
- Hardening positions on the U.S. federal budget and borrowing limit, and recent political setbacks suffered by both Obama and Republican congressional leaders are raising the odds of a government shutdown, debt default or near-miss
- Merkel begins her search for a third-term coalition partner a day after an overwhelming election win gave her the biggest vote tally since Kohl’s post-reunification victory of 1990
- HSBC/Markit’s China manufacturing PMI rose to a six-month high in September, signaling that a rebound in the world’s second- largest economy is gaining steam
- A euro-area manufacturing and services gauge rose more than estimated this month, a separate Markit report showed
- Homes approved for construction in the U.K. rose 49% in the 2Q as government assistance boosted mortgage lending and building permits became easier to get
- Sovereign yields mostly higher. EU peripheral spreads narrow. Japan closed for holiday. European stocks mostly lower, U.S. equity-index futures gain. WTI crude gains, gold and copper fall
Asian Headlines
Chinese HSBC Flash Manufacturing PMI (Sep) M/M 51.2 vs. Exp. 50.9 (Prev. 50.1) - 6-Month high. New Export Orders at a 10-month high of 50.8 vs. Prev. 47.2.
EU & UK Headlines
German Federal Election Results: German Chancellor Merkel's party victory in the German elections appears just short of the votes needed to rule on its own and may have to convince leftist rivals to join a coalition. German Chancellor Merkel's CDU/CSU received 41.5% in the election with all districts counted, meaning Merkel's block need to form an alliance with other parties in a coalition. The Liberal FDP party failed to achieve 5% of votes needed to get into Parliament, as such, Merkel will now be forced to reach out to a different partner.
Italy's economy minister Saccomanni is ready to step down if the country does not stick to its pledges it made to the European Commission, citing his need to defend credibility.
ECB's Liikanen has said the ECB remain 'ready to act' on a new Long-Term Refinancing Operation.
In other Eurozone related commentary, according to sources, the ESM is hiring investment banks to advise on potential rescues of banks amid fears that black holes in the financial system could be unearthed in a move toward a banking union.
Eurozone Manufacturing PMI (Sep P) M/M 51.1 vs. Exp. 51.8 (Prev. 51.4)
Eurozone Services PMI (Sep P) M/M 52.1 vs. Exp. 51.1 (Prev. 50.7)
German Services PMI (Sep A) 54.4 vs. Exp. 53.1 (Prev. 52.8)
German Manufacturing PMI (Sep A) 51.3 vs. Exp. 52.2 (Prev. 51.8)
French Manufacturing PMI (Sep P) M/M 49.5 vs. Exp. 50.1 (Prev. 49.7)
French Services PMI (Sep P) M/M 50.7 vs. Exp. 49.6 (Prev. 48.9)
US Headlines
Late last Friday, Fed's Bullard said low inflation allows Fed to be patient and if US payrolls and unemployment continue to show improvement, greater likelihood of tapering. Said bond buying still an effective tool for Fed and wants to see evidence that inflation is rising before endorsing policy action by FOMC.
Equities
Election results in Germany, which despite now paving the way for policy continuity, together with the latest round of less than impressive Eurozone PMIs failed to inspire appetite for risk in Europe this morning. As a result, stocks in Europe traded mixed, with the Italian FTSE-MIB underperforming in early trade amid reports that Italy's economy minister Saccomanni threatened to step down if the country does not stick to its pledges it made to the European Commission. On the sector breakdown, utilities and technology stocks underperformed, while modest tightening in credit spreads following the widening on Friday ahead of elections in Germany supported financials in Europe.
FX
EUR/USD traded steady, with implieds better bid, as market participants eye next upside barriers at 1.3600. The pair was also pressured by touted EU Common Agricultural Policy-related selling of EUR/GBP, which also saw the cross make a test on the 10DMA line at 0.8407.
Commodities
Analysts at Citi have increased near-term gold and silver price on the back of recent Fed actions to delay tapering and now expect gold to average USD 1250/oz in 2014 from USD 1,145 and sliver USD 20.20/oz from USD 18.00.
The outlook for the bulk commodities continues to deteriorate and analysts at Citi expect the thermal coal price and iron ore price to come under near term pressure. Furthermore, the banks expects 3-month iron-ore to trade at USD 115/ton.
Hedge funds cut bullish gold bets for a second week, reducing long contracts to the lowest since June. According to CFTC, the net-long gold position held by speculators fell 17% to 70,113 futures and options in the week ended Sept. 17. Bullish silver wagers fell 16% to 13,992 in the first two-week decline since May.
Syria have completed the handover of an inventory of its chemical weapons arsenal by the deadline given by US and Russian authorities, according to the chemical weapons watchdog OPCW.
Russia's Chief of Staff has said clarity will emerge within a week on where al-Assad keeps his chemical weapons arsenal and Russia could change their position on Syria if they become convinced the President's forces are cheating. Separately, Russia's foreign min. Lavrov has said Russia is prepared to send troops to Syria to operate in a observer capacity.
China's August crude imports from Iran are up 17.5% Y/Y, a figure that was 9.8% higher than that of July.
Total have announced that within the next three years they expect to see an increase in annual production. This comes as the group anticipate a trend down in 2014 investment with the co. entering a production growth phase and a period of free cash flow.
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Jim Reid recaps the full overnight narrative:
Results of the German Federal election take centre stage this morning. Preliminary final results indicate that Merkel’s conservative CDU/CSU bloc has scored a decisive victory with a combined 41.5% of the vote. Though the result leaves Merkel just short of a majority in the Bundestag it is significantly better than pre-election polls had suggested. It also gives her a large advantage over the main opposition Social Democrats which finished well behind with 25.7%, according to estimates published by the Federal Returning Officer early on Monday morning. There was a sour note to Merkel’s victory - her preferred coalition partners, the Free Democrats, will likely be left out of the Bundestag after losing 9% of support relative to the last election leaving the party below the 5% threshold which would allow them to hold seats in parliament. The Free Democrats’ likely outster from the lower house marks the end of 64 years of parliamentary representation (Reuters). The far Left party took 8.6% of the vote, followed by the Green Party with 8.4%. The eurosceptic Alternative for Germany party took 4.7%, also falling short of the 5% hurdle. If Merkel ends up short of an absolute majority, and the Free Democrats are indeed left out of the Bundestag, the general expectation is that Merkel’s conservative bloc will seek some form of “grand coalition” with the Social Democrats with whom she governed from 2005 to 2009. We’ll hear more about this when German party leaders meet today for coalition talks.
The election result will probably be viewed as positive for Eurozone markets given that its the CDU/CSU’s best election result in 20 years. This will give Merkel a strong hand in coalition talks with other major parties even if there is some short-term uncertainty about who her partners will be. Indeed, EURUSD opened about 0.2% higher overnight shortly after exit polls were made public but has given up most of those gains to trade virtually unchanged from Friday’s closing level of 1.352 as we type.
Elsewhere overnight, markets are fairly quiet with Japan out for a public holiday and Hong Kong markets shut this morning due to a typhoon warning. The HK stock exchange is due to re-open shortly. Sentiment has received a small boost from the September HSBC flash manufacturing PMI numbers for China which beat expectations by 0.3pts (51.2 vs 50.9 expected). The reading is a full 1.1pts above the final August reading of 50.1 and is the highest HSBC manufacturing PMI in six months. The two month gain in the index is now +3.5pts which marks the strongest 2 month improvement in nearly 4 years. In other details of the report, new export orders printed at a 10-month high of 50.8. The data has helped Chinese A-shares (SHCOMP +0.7%) but gains there are also partly reflecting post-FOMC sentiment given that Chinese markets have been closed since last Wednesday. AUDUSD is 0.3% higher this morning and copper (-1.4%) is off the overnight lows. Asia EM sovereign credit is a little weaker overnight, which is mostly a follow-on effect of last Friday’s price action.
Turning to the week ahead, the focus remains on the Fed with about 12 speeches from Fed officials lined up over the next five days. The Fedspeak begins with speeches by Lockhart, Dudley and Fisher later today. This week’s speeches will be closely watched given how markets reacted to St Louis Fed’s Bullard’s comments on Friday where he suggested the September decision not to taper was a “borderline” decision. Bullard also suggested that October’sFOMC was a “live” meeting, which helped drive the S&P500 and the MSCI EM indices to close 0.72% and 0.92% weaker respectively on Friday. On the topic of Fed speeches, the WSJ reported late on Friday that the Economic Club of New York has cancelled an upcoming speech by Janet Yellen as the White House moves closer to selecting a new head of the central bank. The group said Friday that the Oct. 1 speech by Ms. Yellen had been called off but gave no reason.
Staying in the US, budget talks continue this week in an attempt to pass a resolution to fund government operations beyond October 1st. Note that House Republicans passed a bill on Friday that will fund the government but defunds the Obamacare programme. That bill looks unlikely to pass the Democrat controlled Senate though. The key US data releases to look out for this week include today’s flash PMI, consumer confidence and S&P/CaseShiller home price index tomorrow, durable goods orders and new home sales on Wednesday, the third estimate of 2Q 2013 GDP, jobless claims and pending home sales on Thursday, and personal income/consumption on Friday. In Europe, the focus will clearly be on coalition talks today in Germany.
Elsewhere Draghi is due to speak at the European Parliament today (he will also speak in Milan on Friday). Today’s main data releases are the flash manufacturing and services PMIs for Germany, France and the Euroarea. Consensus estimates are calling for a further 0.2pt to 0.4pt improvement in the manufacturing and service PMIs. Looking further out this week, other important data include the Germany IFO survey on Tuesday, French jobseekers data on Wednesday and Euroarea money supply data on Thursday. A busy week on both sides of the Atlantic.