Despite the president's tongue-in-cheek warning to Wall Street that this time it's different, and it that "it should be concerned [30]", that same Wall Street continues to roundly mock his attempts to talk it lower on the third day of America's "shutdown", knowing very well that if things ever turn bad, Mr. Chairman, aka the S&P chief risk officer, will get to work, and rescue everyone from that pesky thing known as losses. Whether the offsetting optimism was driven by made up China non-manufacturing PMI rising from 53.9 to 55.4, the highest in six months, or just as made up non-core European PMI data which also beat expectations despite Germany Services PMI continuing to telegraph a weakness, dropping from 54.4 to 53.7, is unknown and once again not important. So while futures are modestly lower if only until such time as the daily 3:58pm VIX slam takes place just before market close, do not expect any major moves in stocks until either the GOP finally folds and lets Obama have his way, or bundles all shutdown legislation into the debt ceiling negotiation, and careens the US right into the debt ceiling deadline on October 17 without any legislation in place.
The Labor Department will likely release initial jobless claims today for the week ending September 28th despite the shutdown. Dont expect a surge in the print as it cover a period come efore any insurance eligible workers were given a pink slip. US factory orders won't be released now because of the shutdown but the ISM non-manufacturing survey will also be a major focus as will any developments in Washington DC. The Fed’s Fisher, Powell, Williams and Lockhart are also scheduled to speak.
Market summary from RanSquawk:
European equities trade flat despite opening higher in response to the stronger than expected Chinese Services PMI data released overnight. The SMI is the leading index benefitting from the outperformance of the healthcare sector, illustrating how sentiment has turned risk averse over the course of the morning amid hawkish comments from ECB’s Noyer, who described a potential a new LTRO as unnecessary and German services PMI being weaker than expected. PMIs from the Eurozone and Italy were however expectation beating with the latter posting the highest reading in more than 2 years.
It has also been an eventful morning in terms of fixed income with auctions from Spanish treasury demonstrating strong demand, especially for the 10y line which was sold at its lowest yield since September 2010. The UK also saw a strong auction as the bid to cover was significantly higher, which as noted by Citigroup analysts was supported by today’s APF buyback from the BoE. France’s auction went less well with bid to covers weaker for both the ’23 and ’29 offerings, suffering from competing supply from the UK and Germany this week. Looking ahead markets will focus on the release of tier one US data in the form of Durable Goods Orders.
Overnight news bulletin via BBG and Ran
- US government shutdown continues with Fed's Rosengren noting that a the possible disruption to reliable government statistics could further delay a QE taper.
- ECB's Noyer says does not consider that a new long term liquidity operation is currently necessary.
- Chinese Non-Manufacturing PMI (Sep) M/M 55.4 (Prev. 53.9)
- Treasuries decline as House Speaker Boehner said Obama refused to negotiate in a meeting with top congressional leaders about the government shutdown, signaling a lack of progress on resolving the fiscal impasse.
House Republican leaders plan to bring up a measure to raise the debt limit as soon as next week as part of a new attempt to force Obama to negotiate, according to three people with knowledge of the strategy - Draghi has asked a ECB panel to study options for new bank funding measures, as policy makers try to figure out how to deal with any future liquidity shortages, two euro-region central bank officials said
- The Bank of Japan will wait at least until 2Q 2014 before deciding whether to add more stimulus, as it gauges the impact of an April sales-tax increase, said Atsushi Mizuno, a former BOJ board member
- Sovereign yields mostly higher, peripherals spreads tighter. Nikkei little changed; China markets lead gains in Asia. European stocks mostly lower, S&P 500 futures fall. WTI crude, copper and gold lower
Asian Headlines
Chinese Non-Manufacturing PMI (Sep) M/M 55.4 (Prev. 53.9)
Former BoJ board member Mizuno says BoJ on hold until at least Q2 and that BoJ needs time to judge if more easing needed after tax.
EU & UK Headlines
UK Services PMI (Sep) M/M 60.3 vs. Exp. 60.0 (Prev. 60.5)
Eurozone Retail Sales (Aug) M/M 0.7% vs. Exp. 0.2% (Prev. 0.1%, Rev. 0.5%)
German Services PMI (Sep F) M/M 53.7 vs. Exp. 54.4 (Prev. 54.4)
French Services PMI (Sep F) M/M 51.0 vs. Exp. 50.7 (Prev. 50.7)
Italian Services PMI (Sep) M/M 52.7 vs. Exp. 49.1 (Prev. 48.8) - first rise in business activity in 28 months
Moody's said Italy's political instability is credit negative and that the situation is credit negative even after vote of confidence.
ECB's Noyer says does not consider that a new long term liquidity operation is currently necessary.
The Troika left Greece with 6 things they need to take action on before the next visit which include: draft the 2014 budget, and revise its midterm fiscal plan to determine the size of the fiscal gap by 2017.
UK DMO sells GBP 4bln 2.25% 2023, b/c 1.84 (Prev. 1.59) and tail 0.2bps (Prev. 0.4bps).
Fixed income supply Europe saw mixed demand with the Spanish 2018 and 2023 auctions being well received; the 10 year the lowest yield since Sep 2010. France however had saw weaker demand for both lines sold today.
US Headlines
Fed's Rosengren said that a prolonged shutdown and possible disruption to reliable government statistics could further delay a QE taper.
Equities
European equities trade flat with Telecommunications and healthcare sectors the best performing. Risk appetite has been dented by hawkish comments from Noyer, who described a new LTRO as unnecessary and caused a pull back from the gains seen in early trade as European participants responded to stronger than expected Chinese PMI. Telecommunications remain in the green benefitting from positive news for related companies in Europe and Asia.
Telecom Italia trade higher as the board meet today to discuss potential rights issue or sale of the Brazil unit. In Japan Softbank moved above MUFG to become the 2nd largest company in the Nikkei by market cap and resulted in the Telecoms sector outperforming the rest of that bourse by 3%.
FX
The USD index trades negatively despite USD/JPY trading higher and GBP/USD remaining flat as the EUR sees upside as a result of hawkish comments from the ECB's Noyer, who said he considered a new LTRO unnecessary. EUR/USD continues to approach highs seen at the beginning of the year. Amid the EUR strength GBP/EUR approached but failed to break its 21DMA to the downside.
Commodities
Analysts at Nomura maintained iron ore price forecasts at USD 130/t for 2013E, USD 115/t for 2014E and USD 100/t for 2015E.
Analysts at Macquarie note that China's gold demand "seems to be less positive", citing declining Shanghai premiums even though prices declined.
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In conclusion, here is DB's overnight recap via Jim Reid
The US government enters the third day of its shutdown today, and it’s now increasingly likely that the continuing resolution debate will be folded into the fast-approaching debt ceiling discussion. Indeed, House Majority Whip Kevin McCarthy joined other members of congress yesterday in calling for a “one and done” agreement to simultaneously lift the debt ceiling and end the shutdown. If that occurs, it’s likely that Obamacare will be added to the debate on social security and tax reform, amongst other contentious issues, increasing the already massive stakes of the debt limit discussion. Bloomberg is reporting that House Republicans are planning to bring up a plan sometime next week, to tie spending cuts and changes to Obamacare to a bill addressing the CR and the debt ceiling.
Meanwhile, New York Republican Peter King repeated his call for House Republicans to relent on their opposition to a clean CR. King said he met with nine or 10 like-minded Republicans who want a chance to vote on a clean bill. King was the sole Republican to vote with Democrats against his party’s leadership against the rule to allow House consideration of five piecemeal spending bills (Bloomberg). Obama joined Congressional leaders in a one-and-a-half-hour meeting late on Wednesday that Senate minority leader Mitch McConnell described as “cordial but unproductive”.
Despite the fact that the shutdown looks increasingly likely to move past the weekend, overnight markets are trading with a generally firmer tone. Asian equities are seeing gains, but in a similar vein to yesterday, S&P 500 futures are trading lower (-0.1%) despite the gains elsewhere overnight. There was a small bounce in risk when the latest official Chinese non-manufacturing PMI came in at six-month high of 55.4. The September reading is a 0.5pt improvement to the previous month’s 53.9. The Hang Seng (+0.97%), KOSPI (+0.1%) and ASX200 (+0.6%) are all trading firmer, led by resources and mining stocks. USDJPY is trading about 0.3% higher as the Bank of Japan starts its two-day policy meeting today, and the USD index (-0.11%) is poised to close down for the fifth consecutive day. In the Philippines, the Peso is 0.6% stronger against the USD and bonds are 0.5pts higher, following Moody’s upgrade of the sovereign to investment grade. Moody’s is the last of the major rating agencies to upgrade to investment grade.
Even with the congressional debate continuing yesterday, the S&P500 managed to claw back its opening losses of -0.86% to close just 0.07% lower on the day. Oil & gas (+0.25%) and mining companies (+1.3%) led the intraday recovery helped by a +2.2% and +1.1% rally in gold and crude prices. The US ADP employment report came in weaker than expected at 166k (vs 180k expected) and August was revised down to +159k from +176k as initially reported. DB’s Lavorgna believes that the September ADP is consistent with a nonfarm payroll projection of 170k, but we are still unsure as to when that number will eventually be reported. 10yr UST yields rallied 3bp off the back of the data, and amid the ongoing political deadlock on Capitol Hill a number of forecasters pushed out their time horizon for Fed tapering. This is perhaps helping to keep markets relatively calm about the shutdown.
In Italy, BTPs firmed another 5bp after the splintering of the PDL party handed PM Letta a comfortable win in the Senate confidence vote (235 yes vs 70 no). Facing a revolt in his own party, ex-PM Berlusconi was forced to cast his vote in favour of Letta, but it was clear that Letta would have won the vote even without Berlusconi’s support. Interestingly, an opinion poll by the Ipsos Institute conducted before the vote showed 61% of PDL voters felt the party should back Letta and 51% said that the party should pick a new leader to take over from Berlusconi. DB’s Marco Stringa believes that Letta’s government is now less fragile and should be better able to withstand future political reverberations, such as Berlusconi’s potential expulsion from the senate. Recall that the Senate Committee will probably vote in favour of Berlusconi’s expulsion from the Senate on 4 Oct. – a decision that will have to be confirmed by the whole Senate around 20 Oct. The longer term impact depends on whether PDL members reunite behind their historical leader, or if there is a hawk-dove split.
Quickly reviewing the ECB decision, the central bank did not change policy, as was largely expected. Draghi’s press conference comments were incrementally more dovish compared to previous months. He characterised the recovery as "weak, fragile and uneven". There was no real indication that another LTRO was imminent, which when combined with his statement that "the exchange rate is not a policy target for the ECB”, caused the euro to jump 0.4%. In Asian trading, EURUSD (1.360 or +0.2%) is testing the highs last reached in February.
Turning to the day ahead, in Europe service sector PMIs for the Euroarea, Italy and Spain are due today. Across the Atlantic, the Labor Department will release initial jobless claims today for the week ending September 28th. US factory orders won't be released now because of the shutdown but the ISM non-manufacturing survey will also be a major focus as will any developments in Washington DC. The Fed’s Fisher, Powell, Williams and Lockhart are also scheduled to speak.