Overnight Sentiment: Snoozefest

Quiet session so far, with a notable move higher in the last block of trading in China pushing the SHCOMP for its first gain in 6 days, and off post-2008 lows. What precipitated the buying is irrelevant, although we got a good glimpse into the state of the Chinese economy thanks to Australia prior where the RBA cut rates by 25 bps to a historic low 3.00% (a move that sent the AUD higher), a level last seen during the financial crisis, and confirming that not all is well for the Chinese derivative economy despite loud promises from the Chinese politburo that growth is back. Bypassing the bullish propaganda were Renault Nissan's Chinese car sales for November which fell by 29.8% Y/Y. Some "recovery" there too. In Europe, the status quo continues, with chatter out of Germany's Merkel who begins her 2013 election campaign today, that Germany wants a strong Eurozone (it doesn't), and a strong Euro (it doesn't), but that nobody can predict when the Eurozone crisis will end (not even Hollande or Monti who did just that yesterday?). Otherwise sentiment there is still driven by the formal Spanish re-request of aid (and imminent receipt of €39.5bn in bank recap funds) from the EU by mid-December. As a reminder Spain did this originally in June but the algos were so confused yesterday they thought this was an official sovereign bail out request sending risk soaring only to tumble later (only in the New Normal is admission of sovereign insolvency a "good thing"). Nonetheless, despite the massive overvaluation of European markets (more on that later), the EURUSD continues to the upward momentum (in the process further curbing German exports and assuring the German recession), and was last seen trading up to 1.3075, about 30 pips higher.

As noted: SSDD, as nothing has actually changed or been fixed, but merely sentiment rotates based on direction of capital flows.

In other news, the Muddy Water vs Olam mudslinging campaign continues, with both sides making loud noises, but where, in reality, nothing new has been revealed. It is notable that all of the generic allegations lobbed by MW against Olam can be applied to virtually half the companies in the S&P500 with equal validity.

What else to expect today via DB:

Turning to the day ahead, it will be relatively quiet as far as data is concerned. Spain will report its latest unemployment numbers and we’ll get an update on the Italian budget. Also worth keeping an eye on is Merkel’s appearance at the CDU party’s annual congress where the Chancellor is expected to kick-start her bid for re--election in Q3 2013. Elsewhere the EU Finance Ministers will meet in Brussels today while the EFSF will sell up
to EU1.5bn in 3mths, a day after a widely expected one notch downgrade to Aa1 by Moody’s.

And more coherent and comprehsnive summary of recent events once again via DB's Jim Reid:

So the 'Santa Cliff' rally pauses (S&P 500 -0.47%) with a disappointing US ISM number (49.5 vs 51.4 expected) that slightly overshadowed the gradual upward momentum in most of the global PMI numbers released through yesterday. It didn't quite overshadow news that the Duke and Duchess of Cambridge are expecting their first child next year. I can't help thinking that another extra bank holiday is needed in the UK next year to celebrate this.

The fiscal cliff was mentioned within the ISM survey as a cause for caution amongst companies and the latest on all things cliff-related make for similarly uninspiring reading. Towards the end of the US close yesterday the GOP made a counteroffer to Obama’s opening proposal that was put on the table last week. The GOP counteroffer aims to raise $800n in new tax revenue from closing tax loopholes and deductions (without tax rate increases), cuts $600bn on health spending programs and proposes a lower inflation rate to social security benefits. In contrast, Obama’s proposal from last week would raise $1.6trn in revenue including hiking rates on top income earners and included about $350bn in savings from health spending. The White House was quick to reject the GOP offer, saying it “does not meet the test of balance” and leaves the middle class with the bill for deficit reduction. Perhaps the silver lining to all this is that the dialogue continues between both parties, although it seems the existing positions on tax rates and entitlements remain entrenched.

Asian markets have struggled overnight after the ISM and cliff concerns which saw the S&P close near the day’s lows. The KOSPI (-0.2%), and Nikkei (-0.24%) are trading lower, while the ASX200 (--0.62%) continued to sell off despite the RBA’s decision to cut rates by 25bps to a historic low of 3.00% which was a level last seen during the financial crisis.

The EURUSD (+0.05%) is consolidating at the 1.305 level overnight, holding onto six-week highs. Elsewhere in Asia, the Shanghai Composite (-0.17%) continues to forge new postcrisis lows and is on track for its 6th loss in the last seven trading sessions.

In other headlines, it was interesting to see US domestic vehicle sales (12.01m) hit their highest monthly level since January 2008. This was helped by 250,000 unit sales to replace vehicles destroyed by Hurricane Sandy. Elsewhere there was further Fedspeak yesterday leading into next week’s FOMC meeting. The dovish Eric Rosengren from the Boston Fed said there a “strong case” for the Fed to continue with $85bn in monthly bond purchases.However, St. Louis Fed’s Bullard argued that the central bank should not replace its expiring 'Operation Twist' program on a dollar-for-dollar basis.  Bullard added that he may support the adoption of inflation and unemployment thresholds but is worried about a return to the 1970s when rates were kept low to boost jobs at the cost of inflation.

Moving to Europe, Spain formally requested aid and will receive EUR39.5bn in bank recap funds from the EU by mid-December. Markets initially rallied on the news, perhaps as earlier headlines wrongly suggested the country itself was requesting a new bailout. Nevertheless, Spain’s funding costs continue to fall and the 10yr yield ended 6.5bp lower yesterday to close at 5.253% - its lowest level since March 20th.

The much-awaited details of Greece’s buyback were also announced yesterday. The country will purchase around EUR10bn of bonds with prices set at a higher level than expected. The range set by Athens varied between a minimum of 30.2 to 38.1% and a maximum of 32.2 to 40.1% of par value, depending on maturity. Greek 10yr bond yields rallied 128bp to 14.56% yesterday. It was overall a good day for European credit with Xover (485bp) and Main (119bp) a step closer to their YTD tights of 460bp and 113bp, respectively.


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