Overnight Sentiment: European Grumbles With US Semi-Closed

Usually on semi-US holidays such as today, when bonds are closed but equities left to the whims of vacuum tubes, equities do their mysterious ramp and never look back. So far today, however, this has failed to happen with futures at lows, driven by a noticeably weak EURUSD, which has traded down nearly 100 pips from the Friday late day ramp close, currently at 1.2940. It is unclear what has spooked the Euro so far, although all signs point to, as they did 2 months ago, the Spanish lack of willingness to throw in the towel and demand a bailout, thus easing conditions for everyone else if not for Spain PM Rajoy. Today's main event will be European finance ministers meeting in Luxembourg to discuss the recent Spanish economic transformation efforts as well as an attempt to accelerate banking cooperation and implement a banking regulator - something which is needed for the ESM to monetize bank debt, and something which Germany has been firmly against from day one. Additionally, a day ahead of Merkel's visit to German (where she will be protected by 6-7,000 cops), the ministers are likely to make a positive statement on Greece’s progress toward austerity targets, according to European viceroy Olli Rehn said. In other overnight news, German Industrial Production saw a -0.5% decline, which was modestly better than the -0.6% expected. Over in Asia, China reopened from its 1 week Golden Week hibernation with the SHCOMP down -0.56% to 20.76.42 following a small bounce in the China HSBC Services PMI to 54.3 from 52 in August, and with average house prices rising for a 4th month in a row, and even more repo operations by the PBOC, the result is that the market's ungrounded hopium for an immediate PBOC liquidity injection was taken away pushing regional markets lower.

The tentative schedule for today's Eurogroup meeting is as follows (BST):

  • 1100 - ESM arrivals
  • 1400 - ESM round-table meeting, Eurogroup arrivals
  • 1515 - ESM press conference
  • 1600 - Eurogroup meeting
  • 2100 - Eurogroup press conference

And even as the ESM is formally launched today, don't expect Spain to fund its nearly €10 billion ESM contribution now or at any time in the future. It won't, but Germany better: after all someone has to prefund all those hundreds of billions of Spanish 2013 bond auctions.

Summarizing the other key events is DB's Jim Reid:

We won't have a lot of new information this week as we have the usual post-payroll data lull. Indeed we start the week with the US bond market closed for
Columbus Day today and Japan also closed. The US equity market will still be open though but volumes are unlikely to be high.

One of the big events of the week stateside is likely to be the start of Q3 earnings as Alcoa again kicks-off proceedings on Tuesday (after market). As usual it will be a slow start though with just 10 S&P500 firms reporting this week. JPM and Wells Fargo will get things started for the Financials sector on Friday and also note that FedEx's outlook and investor meeting are on Wednesday as the company outlines its cost cutting plans. Consensus expects S&P 500 Q3 EPS to fall 2.3%qoq, which would mark the first quarterly decline in eleven quarters. However analysts expect Q4 to be positive (DB expects +6%yoy), and therefore the guidance will probably be as important as Q3 numbers for which weakness has already been priced in.

In Europe, the 2-day ECOFIN meeting begins today in Luxembourg where Spain and Greece will be on the agenda. No major decisions are expected at the meeting which will largely lay the groundwork for the European Council meeting on Oct 18th-19th. Also in Luxembourg today, Eurogroup President Juncker has convened an inaugural meeting for ESM Board Governors. On Tuesday, Angela Merkel will meet with Greek officials in her first visit to Athens since 2007.

Although Merkel’s visit is likely to be marred by protests with Greece’s largest unions calling for a work stoppage so that members can take part in rallies coinciding with the Chancellor’s meetings with the Greek President and PM. Draghi will appear before the European Parliament’s Economy Committee in Brussels on the same day. Spain’s PM Rajoy is scheduled to meet the French President Hollande in Paris on Wednesday while the Bundesbank's Weidmann is expected to speak at the Bundesbank Cash Symposium in Frankfurt on Wednesday.

The urgency to this week's European meetings will likely be low as Spain finished the week on a high after Reuters said that the ECB would buy large  volumes of sovereign bonds for a period of one to two months once its OMT programme is activated, citing senior central bank sources. The news helped Spanish 10yr bond yields rally 22bp on the day, closing at a two week low of 5.686%. Indeed, Spanish (+1.8%) and Italian (+2.4%) equities outperformed in the day, driving a 1.8% gain in the Euro Stoxx 600.

Despite this, European headlines over the last few days were not encouraging. German manufacturing orders fell 1.3%mom in August (vs -0.5% expected). According to our German economists, the order data corroborates the message provided by recent PMI and other confidence surveys: the German manufacturing sector is decelerating, with little signs of an imminent rebound. There were also reports of further delays to Greece’s negotiations with the troika. The kathimerini suggests that discussions could last another two weeks, which would push proceedings past the European Council meetings on Oct18th-19th. Spain's Canarias region said it would seek EUR757m ($989 million) in aid from the central government, which will make it the sixth Spanish region to tap the central government's EUR18bn liquidity fund. On the subject of bailouts, Cyprus' government will aim to finalise a bailout by Oct 20th, with the majority of funds going to recapitalise banks. The size of the bailout is estimated to be between EU12bn to 13bn (WSJ). Meanwhile tensions remain high in South Africa as Anglo American Platinum fired 12000 striking workers, driving the USDZAR to selloff 3% on Friday.

Overnight markets are weaker with the Hang Seng and KOSPI down 0.7% and 0.6% respectively. Chinese equities have opened 0.7% weaker after their week-long holiday. The Australian dollar is also trading lower overnight (-0.25%), reaching its lowest level since mid-July. The AUDUSD cross has declined in 8 out of the last 10 days. On a more positive note, China’s HSBC Services PMI printed at 54.3, rebounding 2.3pts off August’s lows and contrasting with the official services PMI which showed a sharp monthly deterioration in September.

Moving onto more of the week ahead, G7 Finance Ministers will meet in Tokyo on Thursday. A senior US treasury official said on Friday that the focus will be on what each country can do to boost growth. Indeed it will be an eventful week in Tokyo with the IMF/World Bank meetings running until Sunday. Seminars on topics including sovereign risk and financial stability will be hosted by the IMF on Wednesday and speakers include U.S. Federal Reserve Vice Chairman Janet Yellen, European Central Bank Vice President Vitor Constancio, Bank of Italy Governor Ignazio Visco and Bank of France Governor Christian Noyer. This will be followed by another round of IMF seminars on implementing growth on Saturday with a speaker list that includes Christine Lagarde, World Bank President Jim Yong Kim and People’s Bank of China Deputy Governor Yi Gang. The IMF will also release its World Economic Outlook and Fiscal Monitor on Tuesday and their Global Financial Stability report on Wednesday.

The data focus in the US will be on the trade balance and the UofMichigan confidence survey on Friday. The Fed’s Beige book is due out mid-week. On the political front, the Vice Presidential debate between Joe Biden and Paul Ryan takes place on Thursday. As far as European data is concerned, industrial production and CPI data throughout the week are perhaps the most notable releases. In China, credit and money supply data are due through the week and September’s trade data is due on Saturday. Meanwhile over in Japan, August machine orders data are released on Thursday.

Turning to the day ahead, it should be a relatively quiet start, particularly with the Japanese and US holidays today. Germany’s IP and trade numbers will be the main economic data points but the ECOFIN meetings will likely be the main source of headlines today.


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