All Quiet On The Day After The Day After

The much anticipated Greek vote on "self-imposed" austerity (just like all those other votes on "self-imposed" austerity before it, all of which failed to impose any austerity but merely guaranteed further corruption and certified the Greek inability to be effectively governed) came, saw and passed... and nothing: the EURUSD is now well lower than before the vote for one simple reason - the vote was merely a placeholder to test the resiliency of the government, which following numerous MP terminations, has seen its overall majority drop to 168 of 300, which includes the members of the Democratic Left who voted against the Troika proposal. Which means any more votes on anything split along austerity party lines and the vote will likely no longer pass. And, as expected, Germany already picked up the baton on kicking the can on funding the Greek €31.5 billion payment (due originally many months ago) when Schauble said that it will still be too early to make a Greek decision net week.

In economic news, Australia reported better than expected labor news even as the Japanese collapse continues, with both its September current account surplus and machine orders missing expectations by a mile.

Market-wise, Europe is limping into the US open, with the EUR weaker again due to not only a report that Spain may not seek an ECB bailout this year (as said here over and over, Spain will not seek a bailout until the 10 Year SPGB is back at or above 7%) but also a Market News report that the ECB is now reluctant to actually activate the OMT bond-buying program: of course, why "start" when one can have their broke country and eat it too fund it at near-German levels . Paradoxically, Spain also sold €4.76 billion in 2015, 2018 and 2032 debt (more than the expected €4.5 billion) at muted conditions, thereby the market continues to encourage Spain not to request a bailout, although this may not last, as promptly after the bond auction Spanish debt tailed off, the 2Y and 10Y both sold off, and the Spain-Bund spread is back to 445 bps, the widest since October, and means Spain can finally be getting back in selloff play: and probably not at the best possible time just as everything else, which was in suspended animation until the Obama reelection, also hits the tape.

Today we get two key, if largely irrelevant, central bank decisions come from the BOE and ECB, both of which are expected to do nothing much.

Finally, the most important event going on right now, is the Chinese Congress. For those who missed it, our previews are here: The Far More Important 'Election' Part 1: China's Political Process and The Far More Important 'Election' Part 2: China's Market Implications.

What to watch for today, from SocGen:

Central bank meetings will be centre-stage today, with both the BoE and the ECB on the agenda. The BoE is expected to keep its monetary policy unchanged, namely key rates at 0.50% and Asset Purchase Target ATP at GBP 375bn. Expectations of further quantitative easing have abated after recent positive surprises in the UK.


The ECB is also expected to opt for the status quo. Market reaction will depend on the press conference. However, we don't expect Mr Draghi to deliver a different message to the one from the October meeting. The ECB president is likely to repeat that the OMT programme remains an ECB tool, but comes with conditionality. It will however be interesting to see if he makes any specific comments after the autumn forecasts the EC released yesterday. Nevertheless, he will continue to make clear the euro's survival is a top priority and that the ECB will do all it can to play its part. From an economic standpoint, both growth and inflationary risks are likely to be biased to the downside. All in all, this month's ECB meeting is not likely to make a big difference for market participants: the economic situation does not warrant a rate cut (for now), and the ball is still in Spain's court regarding whether or not the OMT will be activated,.


Lastly, EU finance ministers will meet to discuss the EU budget. Don't expect much progress here, as UK prime minister David Cameron has already vowed to veto an accord if it's unacceptable.


All in all, EUR/USD and swap rates (both US and EUR) will remain driven by risk sentiment today. As the latter is fragile, keep an eye on technical levels as EUR/USD is approaching its 32.8% Fibonacci ratio at 1.2740, while 10Y EU swap rates are nearing a support at 1.65%, and 10Y US swap rates are converging towards a support at 1.65%.

The comprehensive recap comes, as usual, from DB:

Overnight the Greek parliament passed the austerity bill which includes cuts to pensions, public sector salaries, tax hikes and increases in the retirement age. The final vote was 153 for the motion (out of 300 MPs) vs 128 against with 18 abstentions and came amid a second day of protests of almost 100,000 people outside parliament. The coalition came out somewhat bruised, with PM Samaras expelling one member from the New Democracy party with coalition partner PASOK expelling six lawmakers for their failure to support the bill. The Greek parliament reconvenes on Sunday (11th) to vote on the 2013 budget, after which the Eurogroup meeting is expected to approve the next EUR31.5bn bailout payment on Monday (12th) -- if all goes according to plan.

Back to the US election, our Washington correspondent Frank Kelly hosted another call yesterday and suggested that Obama's first 10 days could be crucial and we need to watch to see how conciliatory he is with Republicans. If he shows no signs of compromise in the early stages of his new term it could set the scene for a difficult relationship with the Republican House! Boehner laid out a potential olive branch yesterday, saying that Republicans are open to raising more tax revenue via closing special interest loopholes and deductions, if it is accompanied by tax reform that lowers income tax rates and is in conjunction with entitlement reform. Obama, by contrast, has proposed making a “down payment” on debt reduction by letting the portion of the Bush tax cuts that apply to high-income earners expire. After surveying clients, DB's David Bianco noted there is widespread expectation for the dividend tax rate to be hiked from the current 15% to 20-25% (to be in line with the capital gains rate), with the relatively low increase the trade off for allowing a higher top marginal income tax rate.

On that note, both Fitch and Moody’s were quick to warn of the negative implications to the US rating if an agreement to stabilise the fiscal outlook was not reached soon. For those interested, DB's Chief Economist Peter Hooper will be hosting a conference call today  n the "Outlook for the fiscal cliff after the Election". Call details are included at the bottom of today's EMR.

Turning to overnight markets, most Asian bourses are trading lower, paced by losses on the Hang Seng (-1.4%) and Nikkei (-1.4%). Chinese equities (-1.2%) have failed to be inspired by the start of China’s week-long 18th Communist Party Congress. In a speech at  the congress, General Secretary Hu Jintao said the government aims to double per capita GDP by 2020 and will accelerate financial reforms including yuan convertibility and interest rate liberalisation.

General Secretary Hu also outlined a few new points and DB's Jun Ma noted that the most interesting one is the proposal of "four new modernizations" being industralization, informatization, urbanization, and modernization of agriculture. Of these four key  elements of China's new development strategy, most attention has been given to urbanization. Jun Ma believes that urbanization will be viewed by the new government as the main source of growth for the coming decade, and many policies will be designed to maintain a high pace of urbanization. Meanwhile, on the sidelines PBoC’s deputy governor Yi Gang said he expects the economy in Q4 to be “relatively good”. Curiously it was only a month ago that the governor Zhou himself warned of “relatively large” downward pressures on the economy. Elsewhere in Asia, credit is trading modestly wider (+5bp) and is performing relatively well versus equities.

Looking at the day ahead, the main focus will on the post- meeting announcements from the ECB and the BoE. The ECB’s statement is expected at 12:45pm London time followed by the usual focus on Draghi’s press conference at 1.30pm. The market is not expecting any major policy changes from the ECB but it will be worth watching for any hints on Greece or Spain from Draghi at the Q&A. The BoE’s statement is due at midday today and again the market is not expecting any change to interest rates and the asset purchase program but this week's poor data has slightly increased the risks of further action. Data wise the German and French trade data will be interesting as recent data from core Europe has been generally on the softer side. In the US we get the first initial jobless claims print post-Hurricane Sandy, together with the September trade balance data. However markets will mostly be trying to work out all the risks concerning the fiscal cliff.


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