It has been a relatively quiet overnight session, if with a downward bias in the EURJPY which means futures are just modestly in the red. The action however is merely deferred, with a slew of macroeconomic reports on the horizon, chief of which is the ECB rate decision, which consensus has as unchanged at 0.25%, although Draghi's subsequent conference is expected to lead to EUR weakness, even if briefly, since the central bank is widely expected to downgrade both growth and inflation forecasts. DB adds that the recent rise in eonia — which may reflect concerns about the treatment of LTROs in the end-December AQR and be encouraging the accelerated 3Y LTRO repayments — may warrant a temporary liquidity easing: a special short-term tender; temporarily easing minimum reserve requirements; or — technically possible, if politically controversial — temporarily suspending the SMP sterilization process. Concurrent with the draghi conference, we also get the second revision of Q3 GDP, which consensus now expects to rise to 3.1%, as well as this week's initial jobless claims random number generator. Later in the day the Factory Orders update is expected to show a -1.0% decline, while Fed speakers Lockhart and Fisher round off the day.
Market Re-Cap
After opening lower across the board, stocks in Europe have gradually edged higher and moved into positive territory, albeit marginally, though the price action remained subdued given the slew of major risk events which are due to take place later on in the session. At the same time, Bunds also traded steady, that's in spite of the fact that supply from both Spain and France was successfully absorbed, which resulted in only minor tightening of the SP/GE spread. Looking elsewhere, GBP underperformed EUR, with EUR/GBP also testing the 10DMA line, as market participants booked profits ahead of the policy rate decision announcement by the Bank at 1200GMT and also await comments by Osborne who is due to present the Autumn Budget statement. Just like the BoE, the ECB is also expected to keep rates unchanged, but the subsequent press conference by Draghi is expected to result in EUR weakness, especially since the central bank is widely expected to downgrade both growth and inflation forecasts. Going forward, market participants will also get to digest the release of the weekly US jobs, as well as the second estimate of the Q3 US GDP reports.
Overnight news bulletin summary
- After opening lower across the board, stocks in Europe have gradually edged higher and moved into positive territory, albeit marginally, though the price action remained subdued given the slew of major risk events which are due to take place later on in the session.
- Bunds also traded steady, that's in spite of the fact that supply from both Spain and France was successfully absorbed, which resulted in only minor tightening of the SP/GE spread.
- Looking elsewhere, GBP underperformed EUR, with EUR/GBP also testing the 10DMA line, as market participants booked profits ahead of the policy rate decision announcement by the Bank at 1200GMT and also await comments by Osborne who is due to present the Autumn Budget statement.
- Treasuries steady after yesterday’s stronger-than-forecast ADP pushed 10Y yields to highest since Sept., 2/10 steepest since July; focus on payrolls tomorrow and implications for Fed tapering.
- Bank of England and ECB expected to leave rates unchanged, surveys show; BOE due at 7:00am ET, ECB at 7:45am and Draghi press conference at 8:30am
- Norges Bank left refi rate unchanged at 1.50% at today’s meeting, delayed tightening to mid-2015 amid declining home prices
- U.K. Chancellor of the Exchequer Osborne said the British economy will expand 1.4% in 2013, up from the 0.6% predicted in March; U.K. to introduce capital gains tax for foreign home sales
- Japan economy chief Akira Amari told reporters in Tokyo today that he has been diagnosed with an early stage of tongue cancer, and had submitted his resignation only to see Prime Minister Shinzo Abe reject it
- European banks probably will cut at least 5% of trading and advisory staff next year, according to a survey of three London-based investment-bank recruiters, and the reductions could reach 15% , two of them said
- The gap between rich and poor that Obama yesterday called a “fundamental threat to the American dream” has grown during his administration
- Sovereign yields mostly lower. EU peripheral spreads widen. Asian stocks lower, Nikkei -1.5%, European stocks decline, U.S. equity index futures little changed. WTI crude higher, copper and gold fall
US event calendar:
- Initial jobless claims, cons 321k (8:30)
- Q3 GDP 2nd est., cons 3.1% annualized (8:30)
- Factory orders, cons -1.0% (10:00)
- Fed speakers Lockhart (8:15) Fisher (12:15)
Asian Headlines
Japan's government expects stimulus package to be approved by Cabinet today to lift real GDP by around 1% and create 250,000 jobs, citing unnamed people.
Japan's GPIF should boost foreign assets above 50%, according to Fujimaki EU & UK Headlines
Moody's changes Spain's Baa3 government bond rating outlook to stable from negative; S-T rating affirmed.
In a letter from UK Chancellor Osborne on the Autumn budget statement due today, he said the UK Treasury is to cut spending reserve by GBP 1bln in 2013/14 and cuts to take effect over 3 years through 2015-2016.
French ILO Mainland Unemployment Rate (Q3) 10.5% vs. Exp. 10.6% (Prev. 10.5%, Rev. 10.4%)
Spanish bond auction results: Sells EUR 3.52bln vs. Exp. EUR 2.5-3.5bln
- Spain sells EUR 1.27bln 2.10% 2017, bid/cover 3.62 (Prev. 2.51), avg. yield 2.182% (Prev. 2.101%)
- Spain sells EUR 2.25bln 3.75% 2018, bid/cover 2.20 (Prev. 1.90), avg. yield 2.722% (Prev. 2.871%) - the lowest yield since July 2005.
France sells EUR 3.99bln vs. Exp. 4bln 4.00% 2018, 3.25% 2021, 2.75% 2027
- Sells EUR 1.32bln 4.00% 2018, b/c 2.73 vs. Prev. 2.37, avg. yield 0.83% vs. Prev. 1.02%
- Sells EUR 1.335bln 3.25% 2021, b/c 2.38 vs. Prev. 2.04, avg. yield 1.77% vs. Prev. 2.17%
- Sells EUR 1.335bln 2.75% 2027, b/c 2.57 vs. Prev. 2.75, avg. yield 2.81% vs. Prev. 2.84%
Italy's top court ruled that Italy's electoral law is unconstitutional, piling pressure on political parties to reform a system blamed for creating parliamentary deadlock. According to reports, the ruling is not retro-active so does not affect the status or validity of the current parliament, and may actually reduce the danger of an imminent collapse of PM Letta's coalition
US Headlines
Goldman Sachs economist Hatzius says that US budget pact may not be 'finalised' until Jan and doesn't anticipate another government shutdown.
Equities
Stocks traded steady this morning as market participants refrained from making directional commitments given the slew of major risk events which are due to take place later on in the session. Basic materials and financials led the move higher, with Vedanta Resources trading up 2.5% after analysts at RBC raised the company to sector perform. Elsewhere, Merck shares in Germany surged 3% after the company moved to increase its presence in high-tech electronic devices by agreeing to acquire Apple supplier AZ Electronic Materials in an all-cash deal worth GBP 1.6bln.
FX
EUR/GBP trended higher, testing the 10DMA line in the process, as market participants booked profits on long GBP positions ahead of the policy rate decision announcement at 1200GMT, where the MPC are widely expected to keep rates unchanged. The ECB is also expected to keep rates unchanged, but the subsequent press conference by Draghi is expected to result in EUR weakness, especially since the central bank is widely expected to downgrade both growth and inflation forecasts. Looking elsewhere, AUD came under a renewed selling pressure overnight and tested the key 0.9000 level following the release of a wider than expected trade deficit of AUD 529mln vs. Exp. 350mln.
JP Morgan says USD to strengthen in 2014; buy Vs. TRY, JPY, IDR, CZK
Commodities
China's Jan-Sept gold output up 6.8% on Year with total output in the first nine months of the year to 307.809 tonnes.
India slowing gold exports shrinks jewellery shipping. In the period between April and October, exports of gold jewellery plunged by 54% from a year earlier to around USD 4 billion because of a shortage of bullion.
According to analysts, Brent will most likely exceed USD a barrel for a fourth year in 2014 following OPEC's bet that demand won't weaken enough to warrant production costs.
SocGen say that crude run rates have returned to peak summer levels after yesterday's EIA data showed 555,000bpd increase according to SocGen's Head of Oil, Wittner.
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DB's Jim Reid concludes the overnight recap
The modest fall in the S&P 500 yesterday masked an interesting day for trading. Equity index futures sold off into the release of the ADP employment report but the muted reaction from equities to the significant consensus-beat afterwards surprised some, particularly given that US 10yr rates jumped 5bp in response to the data. Following that, US equities hit an intraday high after the release of the non-manufacturing ISM, which came in much weaker than expected (53.9 vs 55.0). In the detail of the ISM, there was a 3.7 point decline in employment to 52.5 which was the lowest reading since last May. DB’s US economists highlight that the drop off in the employment component contradicted the sizable +176k gain in service sector employment in the ADP report, which was the largest gain in services jobs since November 2012. New home sales jumped 25.4% in October which was the largest one-month percentage increase since May 1980 (+26.8%). The US trade balance narrowed to -$40.6B from -$43.0B in September driven by a 1.8% increase in exports.
One of the reason equities held in relatively well post the ADP was due to unconfirmed reports that a US budget deal was taking shape ahead of mid-December when House Budget Committee Chair Paul Ryan and Senate Budget Committee Chair Patty Murray are supposedly due to announce a deal. Bloomberg reported that there could be an agreement that replaces part of automatic spending cuts and avoids another government shutdown in January and could be reached “by the end of this week”. Towards the end of the session a Washington journalist from CNBC tweeted that “House-Senate budget negotiators near 2-year, $90-B deal offering equal sequester relief for defense, domestic….Budget deal unlikely to raise taxes or hit Medicare, Soc Sec or Ag subsidies”, which was widely disseminated on the newswires.
Elsewhere Gold (+1.7%) saw a much needed relief rally, managing to see its strongest day in six weeks amid shortcovering flows. In other news, after the US market close, Moody’s changed the outlook on Spain’s Baa3 rating to stable from negative. This follows a similar move by S&P on Friday who affirmed Spain’s BBB- rating and changed its outlook to stable from negative. So it appears that a near-term downgrade to sub-investment grade for Spain is off the cards for now. Either way, there was little reaction in the EUR. Staying in Europe, Italy's Constitutional Court handed down a ruling yesterday that the country’s current electoral law was unconstitutional, perhaps providing further momentum to PM Letta’s bid to push through electoral reforms. The court singled out the "winner's premium" system where the coalition with the biggest number of votes automatically gets 55% of the seats in lower house, irrespective of its actual share of the total vote. That was unconstitutional, it said, because there was no lower limit of the number of votes a coalition had to get to secure such a commanding position. The winners premium represents a problem in parliament where there are three hostile but roughly equal blocs (centre right, centre left and anti-establishment). The court also ruled against the way voters could only vote for party lists of candidates, robbing them of a chance to select an individual MP (Reuters).
Turning to Asia, risk appetite is generally low and markets are content to sit on the sidelines. Asian equities are around half a percent to a percent lower and S&P500 futures are flat as we type. The exception is Indian equities (+1.5%) on hopes that the country’s opposition party will win 4 out of 5 recent state elections. Asian bank equities are amongst the underperformers after a profit warning from Standard Chartered Bank’s consumer banking division. In currencies, the AUD remains a laggard after briefly dropping below 0.90 against the USD. The latest Australian trade deficit for October printed at A$529m which was worse than the $350m deficit expected. 10yr Australian government bonds are the notable underperformer in Asian trading (yields +9bp).
In terms of today’s ECB meeting, our economists think it unlikely that a major new policy initiative is agreed at the December Council meeting. Based on public commentary, it seems the ECB Council is not wholly convinced that last month’s refi rate cut is sufficient to counter the risk of “prolonged low inflation”. However DB’s Wall and Moec suspect that the internal deliberations on the net cost/benefits of the various policy options are not complete. The mixed dataflow creates some leeway for the ECB to stall a decision, await new data and make a more informed decision on the state of the recovery. However, the recent rise in eonia — which may reflect concerns about the treatment of LTROs in the end-December AQR and be encouraging the accelerated 3Y LTRO repayments — may warrant a temporary liquidity easing: a special short-term tender; temporarily easing minimum reserve requirements; or — technically possible, if politically controversial — temporarily suspending the SMP sterilization process.
Elsewhere today, the second estimate of US Q3 GDP will garner some attention and the expectation here is that the number will be revised up to 3.1% from the previous estimate of 2.8%. The US data docket also features October factory orders and initial jobless claims. In Europe, all eyes will on the ECB/Draghi while the BoE policy announcement will also be watched. The UK's Chancellor Osborne delivers his autumn statement to the House of Commons at 11:15 GMT.