Contrary to some expectations, the budget deal has done absolutely nothing to push global markets or US futures higher which was to be expected: markets are no longer driven by fundamentals but by such things as carry pairs which signal monetary policies. Sure enough, as a result of the strength in the Yen, overnight markets have reacted with a mixture of cautiousness and optimism. On the cautious side, Asian equities are down across the board which can at least be partially attributed to nervousness at the prospect of a December Fed taper. If Congress passes the budget over the next few days, the probability of a taper next week increase at the margin, given that we have lower fiscal uncertainty (and higher spending) over the next two years. Losses in equities are being led by the Nikkei (-0.7%) and the Hang Seng (-1.3%). Asian credit shows no sign of taper nervousness this morning with the Asia IG index 4bp tighter and high beta EM names such as Indonesia trading firmer (5yr CDS -10bp). 10yr UST yields are unchanged at 2.80% and the US dollar is slightly stronger against the major crosses. The Hang Seng China Enterprises index is down 2.3% ahead of the results of China’s central economic work conference which is expected to end tomorrow and may set a number of economic targets for 2014.
In European trade, equities are seen mainly up across the board with the exception of the FTSE MIB. In terms of fixed income markets, outperformance has been observed in Spanish bonds after being supported by domestic buying, with a tightening in the 5y and 10y SP/GE spread. Furthermore, this morning also saw a Schatz auction which had a lower bid-to-cover ratio of 1.7, compared to the previous of 2.2. From an FX perspective, the USD index has risen after going through the 61.2% fib level taken from the highs seen in the November rally.
The only events due today in the US include the usual US weekly mortgage applications (up 1% this week compared to a -12.8% drop last week) and the monthly US budget statement estimated to post a $140 billion budget deficit. There will be no other major data releases across Europe or the US.
Overnight news bulletin from Bloomberg and RanSquawk
- US Representative Ryan said he and Senator Murray reached an agreement on the US budget deal and that the deal would reduce the deficit without raising taxes and would avoid a government shutdown in January.
- Looking ahead for the session there is a relatively light macroeconomic calendar with the release of the DoE inventories and a US 10y note auction.
- Today also sees the FTSE Quarterly rebalance which is due after-market where Vedanta Resources is set become the third miner to be demoted from the FTSE-100 index this year and is expected to be replaced by the recently privatised Royal Mail.
- Treasuries steady, 10Y yield at 2.80% before U.S. sells $21b of the securities; yield 2.81% in WI trading after drawing 2.75% in November.
- Congressional negotiators are touting a U.S. budget accord that will ease the automatic spending cuts for the next two years, remove the risk of a government shutdown and cut the deficit by $23b
- Wall Street banks avoided their worst fears of the Volcker rule after regulators crafted the ban on speculative trading to leave market-making operations intact
- China’s stocks fell as investors speculated the government may cut growth targets at an economic policy meeting this week
- European Union finance ministers headed toward a showdown with the bloc’s parliament over a bank-failure fund as they struggled to put together a blueprint for their leaders to agree upon next week
- Royal Bank of Scotland Group Plc said Nathan Bostock resigned two months after becoming chief financial officer as Britain’s biggest government-owned lender struggles to return to profit
- Ukrainian activists swarmed into central Kiev, reclaiming the center of anti-government protests after an overnight police raid that left dozens injured
- Sovereign yields lower. EU peripheral spreads narrow. Asian stocks fall, Shanghai down 1.5%, European stocks mixed, U.S. equity index futures decline. WTI crude little changed, gold falls, copper gains
US Event Calendar
- 7:00am: MBA Mortgage Applications, Dec. 6 (prior -12.8%)
- 11:00am: POMO - Fed to purchase $1.25b-$1.75b in 2036-2043 sector
- 1:00pm: U.S. to sell $21b 10Y notes in reopening
- 2:00pm: Monthly Budget Statement, Nov., est. -$140b Central Banks
Market Re-Cap from RanSquawk
In European trade, equities are seen mainly up across the board with the exception of the FTSE MIB, which is being lead lower by Mediolanum following a share placement, with DiaSorin also seeing losses as they are set to be removed from the FTSE MIB. In terms of sector specific movements, basic materials are the only sector in the red following an ebbing lower in gold prices after the recent rally. This move has also been exacerbated by reports that Vedanta Resources is set become the third miner to be demoted from the FTSE-100 index this year. In terms of fixed income markets, outperformance has been observed in Spanish bonds after being supported by domestic buying, with a tightening in the 5y and 10y SP/GE spread. Furthermore, this morning also saw a Schatz auction which had a lower bid-to-cover ratio of 1.7, compared to the previous of 2.2. From an FX perspective, the USD index has risen after going through the 61.2% fib level taken from the highs seen in the November rally. Looking ahead for the session there is a relatively light macroeconomic calendar with the release of the DoE inventories and a US 10y note auction.
Asian Headlines
Asian-Pacific GDP growth is set to rise in 2014, according to an S&P report.
The Chinese government will likely maintain its targets of 7.5% for growth and 3.5% for inflation next year, according to Barclays.
S&P says India's rating may come under pressure if parliament elections show hung result, new government unable to implement reforms.
Goldman Sachs says China's state-owned enterprise reform may reverse stock underperformance.
EU & UK Headlines
Finance ministers from the biggest euro-zone countries reached a political understanding on SRM, but the final signoff will have to wait until next week.
Single Resolution Mechanism (SRM) board to be responsible for banks under direct ECB supervision and some cross border banks, according to a draft paper.
BoE's Andy Haldane, head of financial stability, has called for a revival in the market for bundled-up debt in Britain.
French Non-Farm Payrolls (Q3 F) Q/Q -0.1% vs Exp. -0.1% (Prev. -0.1%)
French Current Account Balance (Oct) M/M -2.1bln vs Prev. -3.9bln (Rev. -3.6bln)
German CPI (Nov F) M/M 0.2% vs Exp. 0.2% (Prev. 0.2%)
German CPI (Nov F) Y/Y 1.3% vs Exp. 1.3% (Prev. 1.3%)
Italy PM Letta says is to aim for 1% economic growth in 2014 and 2% in 2015.
Germany sold EUR 4.38bln of 0% 2015 Schatz, bid/cover 1.7, prev. 2.2 (yield 0.21%, prev. 0.10%) and retention of 12.4% (Prev. 19.4%).
US Headlines
US Representative Ryan said he and Senator Murray reached an agreement on the US budget deal and that the deal would reduce the deficit without raising taxes and would avoid a government shutdown in January. US Senator Murray also commented, stating the the budget deal covers 2 years and added that extending unemployment aid isn't part of the accord. The deal which is expected be voted on by Congress later this week also spurred comments from US President Obama who called the deal a good first step and that the budget pact clears path for critical investments. Obama further stated that the accord breaks the cycle of crisis-driven decisions but that it doesn't include everything he'd like.
US Senate vote on confirming Janet Yellen to head Federal Reserve likely next week according to a Senior Democratic aide.
S&P forecasts the US economy expanding 2.6% next year, which is down from a prior forecast of 3.1%. S&P said it lowered it's forecast for US GDP growth in light of additional sequester spending cuts in 2014 and also commented that low inflation in US means the Fed will likely taper its asset purchases slowly.
Equities
In European trade, equities are seen mainly up across the board with the exception of the FTSE MIB, which is being lead lower by Mediolanum following a share placement, with DiaSorin also seeing losses as they are set to be removed from the FTSE MIB. In terms of sector specific movements, basic materials are the only sector in the red following an ebbing lower in gold prices after the recent rally. This move has also been exacerbated by reports that Vedanta Resources is set become the third miner to be demoted from the FTSE-100 index this year, with the FTSE Quarterly rebalance due after-market. In terms of other stock news this morning, HSBC Holdings have agreed to sell its entire 8.0% shareholding in Bank of Shanghai to Banco Santander with the transaction expected to complete during first half of 2014.
FX
From an FX perspective, the USD index has risen after going through the 61.2% fib level taken from the highs seen in the November rally, which has translated through into GBP/USD which is currently trading near the lows for the session. Furthermore, EUR/GBP is currently trading just below the 0.8400 handle and therefore could see some further movement in the pair during today's session. NZD is still one of the underperformers for the session following overnight news that Fonterra maintained its 2013/2014 Farmgate milk price forecast at NZD 8.30/kg vs. some expectations of a hike, which pressured the currency as New Zealand exports around 90% of its dairy products.
Commodities
US API Crude Oil Inventories (Dec 6) W/W -7500k vs. Prev. -12400k
- Cushing Crude Inventory (Dec 6) W/W 693k vs. Prev. -58k
- Gasoline Inventories (Dec 6) W/W 6270k vs. Prev. -119k
- Distillate Inventory (Dec 6) W/W 1180k vs. Prev. 540k
The IEA monthly oil report raised forecasts for global oil demand growth by 145,000bpd to 1.2mln bpd for 2013 and by 110,000bpd to 1.2mln bpd for 2014. They see persistent upside risks to oil from both supply and demand sides of the market. This follows OPEC's crude oil supply falling in November for a fourth straight month by 160,000bpd to 29.73mln bpd, led by losses in Libya. The IEA also stated that making room for Iran, after years of sanctions could be a challenge for other oil producers as non-OPEC supply rises.
North Korea has begun to sell large amounts of gold to China in a bid to tide over its economic crisis, according to multiple sources familiar with the nations affairs. Furthermore, according to South Korean government data, North Korea holds about 2,000 tons of gold reserves worth at least USD 8bln.
China refined copper production at 654,803 tonnes in November vs 637,958 tonnes in October
- China refined lead production at 386,973 tonnes in November vs 432,710 tonnes in October
Credit Suisse says gold's modest rally is a chance to start new shorts.
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DB's Jim Reid concludes the event recap:
Yesterday was certainly a day that could have done with a bit of a touch-up to make it more exciting although news of a budget deal way after the US close is an important story. The interaction between the budget deal and markets is complicated though as many feel the Fed are more likely to taper if a deal is reached so these negotiations are not easy to interpret from the macro side. The deal was announced by Senate Budget Committee chair Patty Murray and House Budget Committee chair Paul Ryan. The terms of the 2 year agreement will set spending levels at $1.012 trillion for fiscal 2014, reversing a two-year decrease in spending, and increasing slightly to $1.014 trillion in fiscal 2015. The 2 year budget increases spending by $63bn compared with sequester spending levels. An extension of long-term jobless benefits, sought by Democrats, wasn't included in the budget package. The cost of the near-term spending increases will be offset by spending cuts and tax increases over the next decade including $12.6bn higher security fees for airline passengers, $8bn in higher fees for federal insurance of private pensions, $6bn in reduced payments to student-loan debt collectors and $3bn saved by not completely refilling the nation’s strategic petroleum reserves. Another $12 billion of savings will come from reduced contributions to federal pensions, split evenly between military retirees and new civilian workers who start after Jan. 1. This last measure is a strong point of contention amongst Democrats (Washington Post).
The budget deal now goes to the House and Senate for approval. According to the WaPo, the House could stage a vote as soon as Thursday before they officially adjourn for the year on Friday. The Senate will vote before adjourning next week. There is no guarantee that the deal will be approved by both houses, though last night’s announcement did provide a rare display of bipartisanship on Capitol Hill. The level of spending increases and decade-long savings measures are relatively small at $63bn and $85bn respectively which may favour the odds of getting it approved by Congress. For the fiscal conservatives, the budget outlines a net $22bn in savings over the next decade but one could argue that the magnitude of spending cuts are fairly immaterial over a ten year time frame. For the liberals, the deal replaces sequester-level spending cuts, but approves spending at much lower levels than the Democrats had sought earlier in the year. If a deal is approved by Congress, it will likely avoid a government shutdown in mid-January (and for the next two fiscal years), and would bode well for the next debt ceiling debate which is due early next year.
As mentioned above the interaction between the budget deal and markets isn’t likely to be straightforward. Indeed, overnight markets have reacted with a mixture of cautiousness and optimism. On the cautious side, Asian equities are down across the board which can at least be partially attributed to nervousness at the prospect of a December Fed taper. If Congress passes the budget over the next few days, the probability of a taper next week increase at the margin, given that we have lower fiscal uncertainty (and higher spending) over the next two years. Losses in equities are being led by the Nikkei (-0.7%) and the Hang Seng (-1.3%). Outside of Asian equities, risk sentiment is a little firmer with S&P500 futures up 1pt or 0.1%. Asian credit shows no sign of taper nervousness this morning with the Asia IG index 4bp tighter and high beta EM names such as Indonesia trading firmer (5yr CDS -10bp). 10yr UST yields are unchanged at 2.80% and the US dollar is slightly stronger against the major crosses. The Hang Seng China Enterprises index is down 2.3% ahead of the results of China’s central economic work conference which is expected to end tomorrow and may set a number of economic targets for 2014.
Outside of the US budget, it was a fairly dull day but we did note that the 800+ page Volcker rule text had little impact on banks – perhaps because of the long lead time to implementation (mid 2015).. This month’s Eurogroup/ECOFIN meeting ended inconclusively with no agreement on a Single Resolution Mechanism for banks but an additional meeting has been scheduled for 18th December, which is the eve of the next EU Leaders Summit. Finance ministers are also considering approving the creation of a common resolution fund that would become a last-resort fund after a transition period of 10-years.
Turning to the day ahead, Italian prime minister Enrico Letta is expected to hold a confidence vote in parliament to confirm support for his reform agenda. Letta is expected to win the vote. The usual US weekly mortgage applications and the monthly US budget statement are the highlights on the data calendar. There will be no other major data releases across Europe or the US.