Overnight Sentiment: Listless

The overnight session has been largely listless, with the market digesting a less than impressive start to earnings season by Alcoa, which reported declining cash flows, and various other negative earnings preannouncements out of major industrial companies. The IMF has not helped the somber mood with its analysis that by the end of 2013 European banks will need to dispose of up to $4.5 trillion in assets. Asian weakness (even the SHCOMP couldn't rally much on further easing rumors for the simple reason that the PBOC will simply not ease with QEternity out there and a food price hike over the horizon) has dominated the trading session so far. What little goods news there was came out ironically out of Italy and France, both of which reported better than expected August Industrial Production data. Italy IP rose 1.7% on expectations of a -0.5% drop, and up from -0.2% last, while the French Industrial Production posted a surprising surge, following weeks of poor data out of the country, with IP up 1.5% on expectations of a -0.3% print, and up from last month's 0.6%. However, even France warned not to read too much into a number driven by, well, cars and drinks.

"One of the main causes of the overall rise was an increase of 9.9 percent in auto sector output. Another driver was the rise in output of food oils and in beverage production during a month when high summer temperatures boosted demand for drinks. One statistics office official cautioned against reading too much into an August output figure because it is peak month in the summer holiday season and many factories are closed or on limited production, meaning small increases in one area or another can have a large impact on the overall reading. More broadly, industry output over the three months to the end of August was only 0.2 percent higher than the preceding three months and 2.0 percent lower than the same three-month period a year earlier." Elsewhere, Germany had a solid 5 Year auction, while Italy borrowing costs for a 3 and 1 year Bill rose. And that more or less captures the main events.

For the rest we go to DB's Jim Reid with a more comprehensive recap.

In Europe, Greek PM Samaras said that Merkel’s visit yesterday to Athens “has improved [Greece’s] credibility” after the German Chancellor reaffirmed her commitment to keep Greece in the euro. Merkel described the process of Greece’s fiscal consolidation and reforms as being “extraordinarily hard for its people” but warned that “much remains to be done”. Meanwhile, the IMF, in its fiscal monitor report, said that a deeper than expected recession in Greece would “complicate attainment of the ambitious reduction targets”. IMF executive director Menno Snel said on Tuesday that European countries should consider restructuring the Greek debt they hold if the country’s financial burden proves to be unsustainable (Reuters). Also in its fiscal monitor report, the IMF said Greece’s debt would fall to 152.8% of GDP by 2017, compared with a troika target of 137%.

Staying on the periphery Spanish finance minister de Guindos stressed that the yields of Spanish bonds are about 200 basis points above fair value, citing yesterday’s IMF financial stability report which said that yields were unfairly pricing in a risk of a Eurozone breakup. De Guindos also defended the government’s economic assumptions which budget for a 0.5% GDP contraction next year, against the IMF’s latest estimate of -1.3%, saying that “I respect the IMF projections, but they aren’t any different than the projections (other) analysts make”.

Elsewhere Juncker made some positive statements on the reforms progress in Greece and Portugal, and on the latter he expressed confidence that the country would return to capital markets by next year. Draghi yesterday said that the OMT has reduced the “crisis of confidence” that had gripped the Eurozone. He also confirmed that the OMT was strictly conditional on the “strict and effective” compliance of a country to ESM/EFSF programmes.The ball is still firmly in Spain’s court for now.

Looking at the day ahead, August IP data is due for France, Italy, Finland and Greece. In the US the Fed will release its Beige book while on the data side, August wholesale inventories are due. Jens Weidmann will speak today at the Bundesbank Symposium so expect some robust headlines, while Rajoy is due to meet with Hollande in Paris. Germany will auction EUR4bn of 5-year notes today.


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