Yesterday for the first time in years, the irrelevant headlines out of Europe, which continues to pretend to shuffle money out of one pocket (Germany's) into another (everyone else's), was well-deservedly backstage to the Google earnings fiasco one day ahead of the 25th anniversary of Black Monday (which is today). The EU summit was one of the more toothless ones in a long time, with no discussions at all of the one item that matters - Spain's bailout (as well as Greece's) - but with a lot of fluff considerations for a EU banking union and joint deposit guarantees - events which, like in the June summit, Germany has implicitly gone along with for the ride, but explicitly has said only over its dead body and in which it will not participate (note we said "pretends" above). The summit continues today for a second day, and will hardly make any more news than it did yesterday. In real news, GE missed revenue expectations and joins virtually every other company this earnings seasons in confirming deteriorating unfudgable topline conditions. Elsewhere, in Greece a pool by VPRC for Greece Tomorrow showed that the anti-bailout Syriza party would win outright with 30.5% of the vote, with New Democracy getting 27% and the Pasok coalition partners getting 5%. The Neo-Nazis would get 14%. Also notable is that on Sunday Spanish regions Basque country and Galicia hold local elections. As Rabobank warns, Galicia is Rajoy’s home region, and traditional stronghold of his Popular Party. A poor PP showing may highlight political hurdle to making bailout request, thus challenging the recent OMT-inspired support to Spanish bonds. This in turn would confirm what we have said all along, namely that a bailout request means an end to the current ruling regime and political chaos. Finally, the November 25 Catalonian elections may also trigger Spanish euphoria reversal.
More on the European summit non-event from DB's Jim Reid:
EU Summit headlines were thin yesterday but have picked up overnight. In a potentially disappointing development, French President Hollande said that a potential bailout for Spain was not discussed at Thursday’s meeting. The EU leaders issued a joint statement welcoming the progress made by Greece and the Troika in reaching an agreement and stating that the Eurogroup will take necessary decisions following the troika report. The headlines on bank recaps were mixed. EC President Juncker said that a decision on Spain’s banking recap will be made within the next few weeks. Meanwhile, Dow Jones is reporting that the potential for direct recaps of banks could occur in 2013 with a Eurozone bank supervisor to be put in place by Jan 2014, citing French government sources. However, newswires are reporting German opposition to that timetable, and follows Merkel’s speech to the Bundestag yesterday seeking to slow the transition to a single European bank supervisor (FT).
Some more on the Google crash:
Google’s stock fell 10% after the results were leaked, which showed Q3 EPS and revenue 15% and 4% below consensus estimates. The stock was halted trading wise for over 2 hours and finished the day down 8% after activity resumed. Particularly spooking investors was the average cost-per-click paid by advertisers to Google, which fell 15%yoy and 3%qoq as an increasing number of users accessed Google via mobile devices. The cost-per-click on mobiles is about half as much compared to ads on desktop computers (amazing what a quick Google search will uncover!). Microsoft (-0.3%) and AMD (-5.4%) also reported disappointing results, joining other technology industry heavyweights Intel and IBM who released weaker earnings/downward guidance earlier this week. It wasn’t a good day for technology stocks generally, with the IT sector down 1.8%, driving a modest loss for the S&P500 (-0.24%). Indeed technology stocks have lagged in recent weeks, with the S&P500’s IT sector down 5.6% since the recent market peak on 14th September while the broader S&P500 is down only 0.6%.
Meanwhile in other markets:
European equities had a better day with the Stoxx600 closing 0.2% higher, although equities in the periphery were weaker (Italy’s MIB -0.3%, Spain’s IBEX -0.34%). A solid Spanish auction boosted sentiment early in the session helping Spanish 10yr yields close 12bp lower at 5.344% (its lowest level since 2nd April). The average yield on the Spanish 10yr sale (5.46%) also marked the lowest auction rate since January (Reuters). The Spanish Economy Ministry said the government has completed 94.4% of its planned issuance for 2012 and has four more bond auctions planned before the end of the year. Credit took a breather with the Crossover (+7bp) and Main (+3bp) closing wider for the first time in more than a week.
Turning to overnight markets, most bourses are in consolidation mode following a week of strong gains. The KOSPI (-0.9%), Shanghai Composite (--0.1%) and Nikkei (--0.05%) are all lower as we type. PBoC’s advisor Song Guoqing commented overnight that the government will not be providing large economic stimulus this year, although he noted that with CPI falling, the scope for easing was increasing. Notably, Song said that he couldn’t rule out CPI falling below zero in 2013. The comments haven’t hurt the Chinese yuan however which has hit a 19 year high against the dollar in onshore trading. Asian credit is trading marginally wider (+1bp).
Commentary on EURUSD levels from SocGen:
EUR/USD 1.3046-1.3079 overnight range. Spot very quiet overnight and muted reaction after first elements coming from the EU summit. Talk of 1.3100 option expiring today. Market still waiting for concrete news surrounding Greece and Spain to get a clearer direction. Support 1.2989 (10DMA) Resistance 1.3130 (18 Oct high.) USD/JPY 79.22-79.27 overnight range. Spot still bid but capped by 2-month high at 79.47. The JPY remains weak on expectations for further BoJ easing next month.
GBP/USD 1.6032-1.6069 overnight range. The cable stabilised overnight after a huge dip from 1.6170 to 1.6040 yesterday. EUR/GBP hit 5-month highs of 0.8148. Risk sentiment will give the tone today. Focus on EU summit day 2.
AUD/USD 1.0354-1.0384 overnight range. AUD/USD runned ourt of steam overnight, sill caught between positive Asian equities (for a fifth day in a row) and dovish RBA. Equities will give the tone in the short term. Support 1.3042 (200DMA) Resistance 1.0443 (61.8% Fibo).
And what to lookout for today, aside from the usual stock market halts and flash crashes.
Markets did not do much overnight despite European leaders agreed on a new supervisor for euro-zone banks up and running next year. This would pave the way for the bloc's bailout fund to pump capital directly into banks. But Euro-zone leaders stopped, for now, on any news surrounding Greece and Spain.
With two US data reports yesterday indicating slower employment growth in October, it is not too difficult to find excuses to trim back short USD positions after a fairly one-sided affair this week where high beta currencies have made the most of a 3.5% rally in Eurostoxx. This incidentally also puts UST 10y under the spotlight just as buyers and sellers square up around the key 200d ma (1.80%). Failure to pull away from the same 200d ma area in August and September (1.86%/1.88%) resulted in a reversal of yields back to the 1.55%/1.60% zone in both months. A bigger than forecast drop in US existing home sales would on its own not change the momentum, but the EU summit will be more important for risk sentiment with no clear direction for now. Greece is allegedly not on the summit agenda, but a report circulated yesterday suggested that an agreement had been reached on releasing the next bail-out instalment into an escrow account. This would give the Troika the flexibility to halt payments in case of non-compliance with deficit targets. The EU stated yesterday that the official Troika report would not be due before early November, but this did not stop GGB 10y yields from extending their decline to 17.11% vs 20.48% at the start of this month.