Overnight Sentiment: No Dead Cat Bounce

With expectations that Europe will once again become a flaming powderkeg after the US elections are over running high, Europe has so far not disappointed. And as usual, the focal catalyst of greatest pain remains Greece, which is only now learning what ZH readers knew days ago, namely that the Greek "austerity" vote was merely theater, and that Europe, i.e., Germany, has certainly not decided to release any of the much needed cash that Greece needs not only to run its society but to make a key bond payment on November 16. Confirming this was German finance ministry spokeswoman Marianne Kothe, who said on Friday that Eurozone finance ministers will probably not be able to decide at their upcoming Eurogroup meeting on Monday whether to disburse a badly-needed €31.5 billion loan tranche to Greece, as MNI reported earlier. "Speaking at a regular government press conference here, Kothe reminded that German Finance Minister Wolfgang Schaeuble needs the approval of the German Bundestag, the lower house of parliament, before being able to approve any further aid for Greece. “It will be difficult to achieve this by next Monday,” she said." In other words, the Greek default is suddenly in the hands of the German people, of whom at last check  about 60% wanted Greece gone. There is yet hope for Greece, with a story overnight running that George Soros is ready to commit "serious funds to aid Greece." Surely that generosity too will end well for the Greek people who by now must feel as if they are in the 5th circle of a NWO globalization hell.

In other news, the European economic basket case refuses to go away: reports overnight showed that Industrial Production continues imploding, with France tumbling -2.7%, on expectations of a -1.0% drop (down from 1.5%), the worst plunge since the 2009 crisis, Italy dropping -1.5% and -10.5% Y/Y, and Greece down 7.3% compared to a year earlier. Europe is stuck between a rock of a low EUR indicating redenomination risk and a hard place of a high EUR now guaranteed to crush any economic status quo, let alone growth.

All of this, and the continued negative sentiment from the past 2 day sell off means that US traders walk in to another sea of red, with futures solidly in the red, the EURUSD back to testing 1.27, Asia lower across the board, Europe unhappy, and Spanish 10 Year once again eyed closely: the next resistance level is 6% here, and once this breaks it slowly but surely puts the (long, long overdue) OMT activation in play.

To summarize: no dead cat bounce. At least not yet.

A more comprehensive recap from DB's Jim Reid follows:

There have been quite a few soothing words around markets recently on the likelihood that the fiscal cliff, Greece and Spain will all be resolved in a market friendly manner but the US election seems to have been the excuse for the market to start to want to see a bit more actual proof rather than hope on a number of these issues. On the US, newswires are reporting that President Obama plans to make a statement today about his plan for spurring economic growth and addressing the deficit which is likely to serve as the opening gambit in the President’s fiscal cliff negotiations. Republican House Speaker John Boehner stepped up the rhetoric late yesterday, posting on Twitter that while “Obamacare is the law of the land….(the Republican) goal has been, and will remain, a full repeal”.

The S&P500 yesterday closed at the day’s lows of -1.22% which also wraps up the worst 2-day performance in 2012. The index also finished firmly below the 200-day moving average with all industry sectors finishing in the red. The market was initially buoyed by the better-than-expected US trade numbers for September (-$41.5bn vs -$45bn expected) but this was eventually outweighed by news that McDonald’s monthly global sales contracted for the first time in almost a decade and also not helped by another poor day for Apple’s share price (-3.6%). A Reuters article yesterday noted that Samsung’s Galaxy S3 has displaced Apple’s iPhone as the world’s best selling smartphone last quarter. Apple’s recent slide continues to attract plenty of focus as the company’s market capitalisation has now fallen 23% since the peak struck 8 weeks ago. This decline is worth around $155bn or 3.8x what Greece is hoping to get from its next bailout tranche! Over the same period the overall market and the tech sector are down 6% and 12% lower, respectively.

Gold bugs are having a decent run with the precious metal rallying every day over the past week in what is the longest streak since August. Gold is up 3.3% this week but interestingly still around 2% below pre-QE3 levels. The search for 'safe haven' assets was also behind the strong performance in government bonds yesterday. Indeed the 30yr UST bond yields fell nearly 8bps to a two month low of 2.751%. A solid 30-year auction yesterday clearly helped. On the subject of safe havens, German bonds are also having good run, with 10yr yields finishing lower in 12 out of the last 16 sessions. On the other hand, Spanish 10yr yields have crept up gradually after having risen higher in 7 of the last 9 trading sessions. The Spanish spread to German government bonds is now at its highest in 6  weeks (449bps).

The market wobbles were also not helped by some fairly downbeat European headlines yesterday suggesting that Euro-area finance ministers may delay a decision on approving the next bailout payment for Greece until late November as they await a full report on the country's compliance with the terms of its bailout. It appears that the Troika won’t be ready with a full report on Greece until after the Eurogroup meeting on Monday (12th).

Turning to the ECB, Draghi’s post-meeting press conference was relatively dovish, but stopped short of providing assurance that the ECB will move to ease imminently.

On the OMT, Draghi reiterated that the ball is in Spain's court. Nothing new here but suggests that the current stalemate is likely to continue. On Greece, Draghi identified a route by which the ECB might be willing to play a role in helping Greece through an amended troika programme via the ELA – essentially allowing the GGBs to redeem, funded by t-bill issuance financed by the ELA via the banks. Sounds like a game of musical chairs! The WSJ yesterday reported that the Eurozone is considering cutting interest on Greek bailout loans to EURIBOR+80bps (currently EURIBOR+150bp) and increasing the repayment period.

Back to markets and the US selloff is once again setting the risk-tone for Asian markets with major bourses in the red. The Hang Seng (-0.43%), ASX200 (-0.49%) and Nikkei (-0.75%) are all trading lower although off their intraday lows. The risk tone perhaps found a floor following a relatively benign Chinese inflation print (+1.7% vs 1.9% last month and 1.9% expected). Chinese equities (+0.02%) are up for the first time this week although is still poised to 2.2% lower on the week. As we go to print the rest of China's main monthly data has been published with Retail Sales, Industrial Production and Fixed Asset Investment all slightly above expectations.

Turning to the day ahead, it will be relatively quiet with France and Italy reporting September industrial production. Over the weekend, the Greek government is set to vote on the 2013 budget. In the US, the UofM preliminary consumer sentiment reading is the main print. President Obama is expected to deliver his statement from the East Room of the White House, although no time for the statement has been given.