If Obama's intention in his CNBC interview was to get Wall Street to start selling, then congratulations: today he finally made some headway. However, he will have to do more before the capitulation dump we saw in the summer of 2011 pushes the House, and Boehner to finally fold (in the case of the latter, for the last time). Much More. Goldman's Sales and Trading desk explains:
- Today was the first day that concerns about the debt ceiling really started to be felt. SPX tested the uptrend from the Nov12 lows but overall it still feels like risk-reduction rather than clients putting on active bearish trades. With the shutdown ongoing maybe earnings can save the day (and month). Utilities +0.6% but everything else closes down with telecom worst hit, down 2.4%. Closing levels: SPX -1.23% to 1655.45, DOW -1.07% to 14776.53, NASDAQ -2.0% to 3694.83.
- The VIX closed up 0.93 to 20.34, just shy of the highest levels of the year.
- FX in a holding pattern today, only notable moves were CAD and MXN, both down 0.6%. USDJPY continues to trade slightly above but perilously close to its 200dma. We have tested it a few times without a clean break lower, despite a decent amount of USDJPY put interest. FOMC minutes the highlight tomorrow as we all wait to get more information about just how close a call it was not to taper.
- The Treasury curve flattened again as 2s closed 2bps weaker while 5s, 10s, and 30s rallied 0.5bps, 2bps, and 3bps respectively. Today’s 1m bill auction was closely watched, opening at 15bps, clearing the auction at 35bps (2bp tail), and finally closing at 26bps. We also had a 3y auction that cleared 0.7bps through at 0.71%. Flows overall were quiet but skewed to better selling from a variety of accounts. Tomorrow is the 10y auction.
And some additional insights from Scotiabank's Guy Haselmann
Market Comment
- Washington remains firmly divided with little sense of urgency on either side. The S&P slid slightly more than 1% today and remains higher by over 16% YTD. Treasuries and the dollar were reasonably stable. Lawmakers are typically reactionary and markets have (so far) given them little reason to panic. Tensions will rise as Treasury Secretary Lew’s Oct 17th debt ceiling deadline approaches. CNBC has a countdown clock to this date that will perpetually remind investors and allow suspense to build.
- “Risk-free” Treasury bills showed some initial signs of concern over the debt ceiling stalemate. Bills maturing over the next 30 days rose above 30 basis points today as banks refused to take them as collateral for fear of not being paid. The T-Bill rate was above LIBOR for the first time in 12 years. This technically means that corporations can borrow unsecured more cheaply than the US government over this time frame. T-Bill investors will ultimately get paid, but uncertainties over a potential delay have prompted security sales and a migration to bank deposits.
Hilsenrath – Reasonable Idea Gone Wrong?
- When the WSJ puts a Jon Hilsenrath Fed article on its front page, it is often (correctly) assumed that it was leaked. The Fed’s efforts to expand its transparency could have transcended into using Hilsenrath in order to help explain its actions and complicated internal debates. This makes sense since the market believes its debates have ultimately resulted in confusing messages and lost credibility. Today’s article attempts to explain the history and timeframes of changes in FOMC communication. The purpose of the ‘leak’ is probably to reconcile how the markets came to expect a September tapering and why the FOMC disappointed market expectations.
- If my premise is correct, I believe this well-intentioned plan has back-fired. The article appears more successful at emphasizing the FOMC’s disunity and the considerably divergent views of members. The way Hilsenrath presented the arguments for making some decisions made the Fed look unsophisticated and insecure with a muddled communication strategy. Nonetheless, Hilsenrath’s concluding sentence suggests the Fed is wonderfully successful, since the 10yr has “moved back to 2.63%”. However, while the article intended to trumpet ‘success’, in reality, the article may have done damage, as it accentuates the challenges, disparities, and risks facing the FOMC.
- FOMC concerns about the economic impact of sequestration, as well as the sensitivities to fiscal gridlock, were likely greater than commonly perceived by Wall Street. Therefore, anxieties about implementing their exit strategies were high, particularly as lawmaker squabbles were active. However, once some type of deal is reached, FOMC members will naturely look more unified as they collectively shift their focus toward implementing an exit strategy as soon as reasonably possible.
Random Thoughts
- Democracy Corps, the research and polling firm of James Carville and Stan Greenberg, who were advisers to President Clinton, has produced an interesting report that tries to explain the mindset of the Republican Party’s supporters. The report states, “While many voters question whether Obama is succeeding and getting his agenda done, Republicans think he has won. The country may think gridlock has won, but Republicans see a President who has fooled and manipulated the public, lied, and gotten his secret socialist-Marxist agenda done. Republicans and their kind of Americans are losing.”
- US prosecutors have given SAC Capital until November to resolve criminal charges or risk paying more than the $1.8 billion fine currently on the table.
“Patriotism is supporting your country all the time, and your government when it deserves it.” – Mark Twain