Black Friday Fails To Bring A Budget Deal For Europe

First it was Greece, which Europe couldn't "resolve" on Monday night despite Juncker's vocal promises to the contrary, and was embarrassed into postponing until next Monday when everything will surely be fixed. Now, the time has come to delay the "resolution" of the EU budget, which was supposed to be implement last night, then a decision was delayed until today, and now every European government leader is saying a new meeting will likely be needed to resolve the budget impasse.

As BBG summarizes, "Divisions between rich and poor countries flared over the European Union’s next seven-year budget, leading German Chancellor Angela Merkel to rule out an accord until the new year. France defended farm subsidies, Britain clung to a rebate and Denmark demanded its own refund, while countries in eastern and southern Europe said reduced financing for public-works projects would condemn their economies to lag behind the wealthier north. “Positions remain too far apart,” Merkel told reporters early today after the first session of a summit in Brussels. “Probably there will be no result at the end of this summit. There may be some progress but it is probable that we will need to meet again at a second stage."  In other words the same old absolute and total chaos from the European Disunion we have all grown to love, in which the only solution each and every time is to delay reaching a solution, at least until after Merkel is reelected and in the meantime kicking the ever greater ball inventory in Draghi's court, where he too will promise to make everything better as long as he actually dosn't have to do anything.

On the surface this kind of political clowning should be bad for risk: however, in Europe BIS' FX trading team always operates deep below the surface, and while all the news about fixing being interrupted are ignored, what did impact the EURUSD, and thus broad risk, overnight was the reflexive German IFO Confidence release, which printed at 101.4, above expectations of 99.5, and higher than the October print of 100.0 which also happened to be the February 2012 low. Nevermind the ongoing deterioration in German PMIs, of which the service component dropped to 2009 low levels, and that an IFO economist warned German Q4 GDP may (read "will") come in negative for the first time in years - the jittery headline scanning algos took the news and sent EURUSD higher by 40 pips, making German exports that much more uncompetitive.

In other news, the Greek deal was percolating, with various permutations being contemplated, and now even Goldman's Themistoklis Fiotakis on hope the debt buyback will be greenlighted over objections by the broader Greek society, and all those other European countries who will soon realize their EFSF funding is being used not to bailout Greece, for whom it is not a question of debt stock, but lack of GDP flow, but to generate massive hedge fund profits.

Finally, with the US trading session today at half mast, expect another record low volume half-trading day, which means a risk levitation is practically guaranteed. Headlines scanned for by the few trading algos will be anything promising a "massive", "unprecedented", "record" Thanksgiving retail season, just like last year, when a month later everything was inverted and it was subsequently learned that the bulk of the purchases had been returned to the sellers.

Some more macro previews from SocGen:

The market should be very quiet today, as many US investors are off on Thanksgiving break.


All eyes will thus be on the eurozone with the publication of French and German business confidences indices. The French index hit its August 2009 low last month ahead of the publication of the 2013 budget. Thus, a correction is expected, but the index will remain at low levels. German IFO business confidence could continue to deteriorate, although it hit its February 2012 low in October.


We note that lower-than-expected indicators could revive expectations of rate cuts by the ECB on 6 December. The SG scenario does not factor in an interest rate cut as they are already very low (repo rate at 0.75% and deposit rate at 0.0%): the potential disadvantages (money market fund outflows) would outweigh the advantages (could a 25bp cut have a major impact on activity?). We will also be paying close attention to President Draghi's speech today.


Overall, the EUR/USD could rapidly hit a ceiling and 2Y Bund yields fall back into negative territory.

And a complete review of what little happened overnight from Jim Reid:

Black Friday actually began on Thursday for many US consumers who cut short their Thanksgiving dinners to be amongst the first through the doors of retailers that opened earlier than usual this year. A number of chain retailers including Walmart and Toys R US were said to have opened at 8pm yesterday in an effort to kick-start sales ahead of the all-important holiday shopping season. Although for those who wish to let the fingers do the walking and shop from the comfort of your homes Cyber Monday also presents an attractive alternative. So watch out for commentary from retailers and industry groups next week for this weekend’s sales performance which should shed some light on consumer sentiment amid the ongoing ‘fiscal cliff’ uncertainty.

With the US markets closed for Thanksgiving, yesterday was a relatively quiet day for markets. In Europe, the Stoxx600 closed at the day’s highs (+0.59%) led by solid gains in the peripheries. Main bourses in Greece, Italy and Spain finished +1.99%, +1.03% and +0.90% higher on the day, respectively. The European market seemingly breathed a collectively sigh of relief that the manufacturing sector PMIs, although still mired in contractionary territory, have showed some signs of improvement. Indeed the flash Eurozone manufacturing PMI for November came at 46.2 (vs 45.6 expected and 45.4 previous) helped by improvements in France (44.7 vs 43.7 prev) and Germany (46.8 vs 46.0 prev). The services PMIs were softer though which took some shine away. The eurozone services PMI fell 0.3pts on the month to 45.7. This was also accompanied by a 0.5pt and 0.4pt drop in France’s and Germany’s services series, respectively.

Assuming no change in the November and December final readings, our European economists noted that the PMIs would point to a euro area GDP contraction of 0.5% qoq in Q4 which is broadly in line with their forecasts (-0.4% qoq). Staying on PMIs for a bit and turning back to  yesterday’s flash HSBC manufacturing PMI in China. DB’s Jun Ma thinks that yesterday’s 50.4 print correlates with an official PMI reading (to be reported on Dec 1st) of around 51 which would be a 0.8pt improvement on the October reading. Also in yesterday’s flash PMI report, the sub-indices of new export orders and output rose by 5.7pts and 3.0pts to 52.4 and 51.3, respectively. Jun believes that the rise in output was driven by raw material inventory restocking which is consistent with the recent rally in commodity prices.

The positive risk tone is extending into the overnight session with Asian bourses mostly higher across the region. Gains are led by the Hang Seng (+0.28%) and Shanghai Composite (+0.73) although volumes and news flow are predictably thin given Japan’s Labor Thanksgiving holidays. Sentiment in Korea was initially weighed by reports that North Korea is preparing to test a long-range ballistic missile. Away from geopolitical headlines, Airline Cathay Pacific overnight described the cargo business as a “huge challenge” and added that cargo revenues are down 13% YTD.

In the FX space, USDJPY is trading 0.3% lower this morning (82.2) and is on track for its biggest downward move in two weeks. This follows a WSJ article which cites Japan’s opposition leader Shinzo Abe as saying that he would be reluctant to intervene in the Yen. In a departure from his strong dovish rhetoric of recent weeks, Abe said that past intervention hasn’t been effective, and monetary policy alone isn’t enough to stop deflation.

Turing back to Europe, EU President Van Rompuy called an end to the first day of the EU Summit at around 11pm London time last night to allow heads of state some time to study a revised budget proposal that provides for EUR1 Trillion of spending between 2014-2020. The revised proposal allows for EUR80bn in spending cuts which are designed to appease the more hawkish leaders. EU leaders will study the proposals overnight and reconvene at midday today for negotiations. Merkel said that she doubts a budget deal will be reached at this week’s summit and most likely a second summit will be needed early next year.

Moving on to today, there will be very little as far as data flow is concerned. Germany’s IFO survey and Italian retail sales are the two main reports out today. We may get further headlines out of the EU Summit but we should see a relatively quiet end to the week with only a half-day market in the US.