The best summary of what has (not) been going on in the downward drifting equity markets comes from DB's Jim Reid, quoting: "Markets are in non-panicky limbo at the moment ahead of the upcoming US budget debate. US equities fell for the 5th day in row (S&P 500 -0.27%) and although this is the worst run since the Christmas/New Year’s Eve period of 2012 (due to the fiscal cliff debacle), the cumulative fall is only -1.9% over this decline. Meanwhile Treasuries hit a 7-week low in yield as they recorded their 12th decline in the last 14 days."
As has been the case over the past week, stocks in Asia have generally traded lower with the exception of the Nikkei225 which day after day continues to do its insane penny stock thing, first dropping -1.5% only to close up 1.2% on absolutely no news, but some chatter the Abe administration would raise the sales tax on October 1, only to offset the fiscal benefit by lowering corporate tax. How this has any net impact is beyond us. Proceeding to Europe, stocks failed to sustain the initial higher open and moved into negative territory, with Italian asset classes underperforming, as market participants digested reports citing Italian MP Gasparri saying that PdL lawmakers are ready to quit if Berlusconi is ousted. This in turn saw a number of Italian banking stocks come under intense selling pressure, with the Italian/German yield spread widening in spite of supportive reinvestment flows that are due this week.
The sentiment took another hit after the Japan Pension Panel advised government to re-examine bond holdings but steered clear of indicating that the fund will increase stock holdings. As a result, having rallied overnight above the 50 and the 100DMA lines on the back of speculation of a potential announcement regarding reforms to public pensions, USD/JPY promptly pared around half of the move. Going forward, market participants will get to digest the release of the final GDP reading, weekly jobs and the US Treasury will sell USD 29bln in 7y notes.
Overnight Bulletin Summary from RanSquawk and Bloomberg
- Treasuries mostly steady, intermediate yields dip 1bp lower overnight; week’s auctions continue with $29b 7Y notes, yield 2.02% in WI trading; drew 2.221% at August auction with lowest bid-to-cover since May 2009.
- U.S. Treasury Secretary Lew stepped up pressure on Congress to avert a potential default, telling lawmakers in a letter that measures to avoid breaching the debt ceiling will be exhausted on Oct. 17
- U.S. Senate is accelerating debate on a bill that would avert a U.S. government shutdown as Senate Republicans sought to buy time for their House counterparts to take another swipe at President Obama’s health-care law
- Fed’s Lacker, who voted repeatedly last year against expanding stimulus, said the Fed’s $3.72t balance sheet and guidance on the likely path of interest rates increase the risks and costs of policy mistakes
- JPMorgan’s negotiations with federal and state authorities to resolve a series of investigations tied to mortgage bonds are focusing on a potential $11b figure, including $4b for consumer relief
- Ansa cites Italian President Napolitano saying yday there was an “unexpected” political development that requires his full attention today
- U.K. prosecutors may bring another round of charges against traders and brokers linked to the Libor scandal as soon as next month; the investigation is now in its fifth year
- U.K. 2Q economic growth accelerated as higher consumer spending helped to blunt the impact of a drop in business investment
- Sovereign yields mixed with Italy, Spain 10Y yields ~5bps higher, EU peripheral spreads higher. Nikkei rises 1.2%, Asian markets mixed. European stocks mostly lower, S&P 500 futures up slightly. WTI crude, copper and gold rise
Asian Headlines
Japan pension panel advises government to re-examine bond holdings, adding that it aims to boost returns and limit risks. Japan GPIF and other public funds should alter current emphasis on JGBs in their portfolio allocations.
Japan LDP tax panel's Noda said PM Abe is to give economic steps at the same time as the tax decision on October 1st. There were also reports that the Japanese government plans to include a pledge to promptly start a study of a reduction in the country's effective corporate tax rate.
EU & UK Headlines
Italian MP Gasparri said PdL lawmakers ready to quit if Berlusconi is ousted and agree to oppose the former premier's expulsion.
Spanish PM Rajoy said no more austerity is needed for Spain to meet its 2013 deficit goal. Rajoy said Spain will revise 2012 deficit to 6.8% vs. 7%.
UK GDP (Q2 F) Q/Q 0.7% vs. Exp. 0.7% (Prev. 0.7%) - ONS says revised UK Q3 GDP growth to +0.6% vs. Prev +0.7%, Q4 2012 to -0.3% vs. Prev. -0.2%, full year 2012 +0.1% vs. Prev. +0.2%, Q1 2013 to +0.4% vs. Prev. +0.3%.
UK GDP (Q2 F) Y/Y 1.3% vs. Exp. 1.5% (Prev. 1.5%)
Eurozone M3 Money Supply (Aug) Y/Y 2.3% vs. Exp. 2.3% (Prev. 2.2%) - Lending to companies and households in the euro area fell the most on record in August.
Barclays month-end extension: Euro Aggr +0.11y
Barclays month-end extension: Sterling Aggr +0.24y
US Headlines
Fed's Lacker says forward guidance, large balance sheet could make it harder to withdraw stimulus in timely fashion. Added that it is going to be harder for Fed to communicate credibly in the future and that he sees no reason not to taper as early as October.
Barclays month-end extension: Treasury +0.06y
Equities
Stocks failed to sustain the initial higher open and moved into negative territory, with Italian asset classes underperforming, as market participants digested reports citing Italian MP Gasparri saying that PdL lawmakers are ready to quit if Berlusconi is ousted.
In terms of notable stock movers, Alcatel-Lucent shares surged over 6% amid reports of a potential link-up with Nokia. While H&M shares also rallied, lifting Inditex in Spain in the process, following better than expected earnings.
FX
Japan Pension Panel advised government to re-examine bond holdings but steered clear of indicating that the fund will increase stock holdings. As a result, having rallied overnight above the 50 and the 100DMA lines on the back of speculation of a potential announcement regarding reforms to public pensions, USD/JPY promptly pared around half of the move. Consequent move lower by EUR/JPY, ensured that EUR/USD failed to benefit from any upside traction by EUR/GBP following the release of less than impressive UK GDP report. As a result, both EUR/USD and GBP/USD traded lower this morning
Commodities
China July gold output at 39.367 tonnes, according to industry association. In other gold related commentary, Vietnam central bank said the demand for gold declines and that it will intervene in the gold market if needed. Analysts at Macquarie expect iron ore prices to remain above USD 115/t over the next two years and will remain above USD 100/t out to 2020. Chinese iron ore industry is expected to behave in an economically rational way, as the financial and political incentives to support a loss making sector are no longer present.
US, Russia, Britain, France and China agree on core of UN Security Council resolution on ridding Syria of chemical arms, according to diplomats. Russia ready to help guard Syria's chemical weapons sites according to Russian Deputy Foreign Minister Ryabkov.
OPEC are planning to meet today to find a new secretary general to replace El-Badri who is set to quit the role at the end of the year.
BofA expects less than USD 10bbl drop in Iran oil embargo ends.
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The traditional conclusion: DB's Jim Reid recaps everything in easily digestible format
Markets are in non-panicky limbo at the moment ahead of the upcoming US budget debate. US equities fell for the 5th day in row (S&P 500 -0.27%) and although this is the worst run since the Christmas/New Year’s Eve period of 2012 (due to the fiscal cliff debacle), the cumulative fall is only -1.9% over this decline. Meanwhile Treasuries hit a 7-week low in yield as they recorded their 12th decline in the last 14 days.
In Asia, we’re seeing the weakness generally continue. With the exception of the Nikkei (++1.2%), other major equity markets are trading weaker including the Hang Seng (-0.4%) and Shanghai Composite (-1.5%). In Japan, there is chatter that the Abe administration is studying the possibility of a corporate tax rate cut amongst other stimulus measures to be announced shortly by the government (Kyodo News). The Nikkei bounced off earlier lows of -1.5% as a result of the headline and USDJPY bounced 80 ticks to 99.0. S&P 500 futures are a touch firmer (+0.15%) heading into the European open.
In terms of the latest on US budget negotiations, the Senate cleared the last hurdle to take up the House-passed continuing resolution bill, despite Republican Senator Ted Cruz’s more than 21-hour speech aimed at delaying the legislation. I'd hate to be his speech writer. The Senate will vote to end the debate surrounding the continuing resolution on Friday morning, then will engage in up to 30 hours of debate and votes on amendments, and will bring the resolution forward for final passage on Saturday (Associated Press). The general consensus is that the Democrat-controlled Senate will exclude the House bill’s Obamacare de-funding provisions, pass the revised bill and send it back to the House by Sunday for their approval. The House at that point will have around a day to approve or reject the Senate bill which will determine whether there will be a government shutdown or not. On the separate but related debt ceiling debate, Treasury Secretary Jack Lew wrote in a letter to Speaker John Beohner that the debt ceiling will be reached on October 17th. Lew also said that instead of the $50bn in cash on hand that he estimated a few weeks ago, the cash balance will be closer to $30bn in mid-October.
DB FX strategist Alan Ruskin notes that of the last 17 government shutdowns, the S&P 500 has showed a pattern of being down in the 10 days before shutdown (median performance -0.33%) and up 10 days after any shutdown resolution (+1.1%). So far, we seem to be modestly underperforming that historical pattern. With three days to go, the S&P 500 is down 0.7% over the last seven trading sessions. In terms of bonds, 10yr UST yields have tended to go up in the 10 days before shutdowns (median performance: +5bp) and have rallied in the 10 days after resolution (-6.8bp). Over the last seven days, yields are actually down about 22bp. Meanwhile the US dollar index has usually weakened prior to a shutdown (-0.5%) and strengthened in the 10 days afterwards (+0.5%). The USD index is down 1% over the last seven days with three more days to go. So the above shows that a shutdown is neither unique nor is it something that tends to deeply stress the market in advance. Mild weakness is the default historical precursor to it.
Whilst the impact arising from the US budget debate is still working its way through various asset classes, Alan also highlighted a few interesting statistics from the US Q2 flow of funds that sums up the state of the bond market and the Treasury market's dependence on Fed. So the good news first, Alan noted that Treasury issuance is way down, only $299bn vs. $1186bn in Q2 2012. The bad news is, in Q2 Households sold $190bn; Deposit institutions sold $100bn, money market funds sold $19bn, brokers and dealers sold $135bn. So who bought? The rest of world bought $89bn which is way down from more than half a trillion dollars in each of last 5 quarters. That leaves the Fed that bought equivalent of $549bn annualized. As issuance comes down the Fed is going to buy nearly all the issuance (depending on the particular quarter's financing needs) until it tapers substantially, but the breadth of the selling from other players is still interesting. Alan noted that the Fed may never acknowledge it (how could they), but there are likely to be some legitimate official concerns about who becomes the marginal buyer as/when the Fed steps back, especially if foreign Central Banks are using USD reserves to try protect their currencies from depreciating.
Returning to markets, the S&P 500 was range bound between 1692 and 1702 on Wednesday but was dragged lower in the second half of the session on the back of a report by Bloomberg suggesting that Wal-mart will be cutting orders with suppliers in response to rising inventory. This weighed on retail stocks (- 0.82%) in general. The Bloomberg article cited an email from a Wal-mart purchasing manager to a supplier which said that the retailer is “looking at reducing inventory for Q3 and Q4”. In FX land, EM currencies were under pressure all day and the release of better than expected new homes sales (+7.9% MoM vs +6.6% expected) saw the USD gain against most currencies. DB’s economists believe the home sales gains are even more impressive given the lack of inventory of new homes, which at 175k currently, is still lower than at any other point in the previous six business cycles. Headline durable goods orders (+0.1% vs -0.2% expected) increased modestly in August after the prior month was revised down from -7.4%. Excluding transportation, orders fell - 0.1% which was weaker than the 1.0% gain expected.
In the credit markets, the wave of new issuance (particularly in US dollars) remains a dominant theme as DM and EM corporates take advantage of the respite in rates to shore up funding and term out capital structures. Yesterday we saw mining giant BHP price $5bn in USD bonds, including a rather long 30year bond, that attracted more than $25bn in orders. Indeed, this month is now the biggest new issuance month for US corporate bonds ever, with US$194bn tallied so far and with three sessions still to go, according to Bloomberg data. The month-to-date total eclipses the previous monthly record of $177bn set in September 2012. It’s probably no major surprise that September has broken new issue records though. In the past few weeks we’ve seen Verizon set the mark with the largest investment grade deal ever ($49bn) while Sprint Corp priced the biggest high yield offering since 2008 ($6.5bn).
Turning to the day ahead, markets will be keeping a close watch on Capitol Hill for any update on the passage of the CR. There is a fair bit on the data docket today starting with French consumer confidence, Italian retail sales and euro area money supply data. In the US, the weekly initial jobless claims, pending home sales and the Kansas City Fed’s manufacturing activity survey are scheduled. We also get third revisions on US Q2 GDP. FOMC member Jeremy Stein will be speaking on the topic of “Yield Oriented Investors and the Monetary Transmission Mechanism” in Frankfurt.