Overnight Summary: Some Trivial Non-Fiscal Cliff Developments

In a world in which the Fiscal Cliff, including headlines, rumors, leaks, and mere whispers thereof, is the main show, all other data points are at best supporting data actors. There was a lot of support overnight - for the futures, which once again closed the prior session at the lows - with a battery of PMIs released, starting with the December HSBC China Flash PMI which printed at a excel picture perfect 50.9 vs an expectation 50.8 and above 50 for the second straight month, which sent the Shanghai Composite up 4.32%, and wiped out the bitter aftertaste from the Japan December large manufacturer Tankan index which tumbled to -12 on expectation of a -10 print, confirming the Japanese recession is deteriorating at the worst possible time. Then after China, Markit released a bevy of European PMI data which came in mixed: Services PMI rose from 46.7 to 47.8 in December, beating expectations of a 47.0 print, while the Manufacturing PMI rose modestly from 46.2 to 46.3, missing expectations of a 46.6 result. The biggest wildcard once again was Germany, where the Service PMI, like in the US, posted a sizable rise, posting above 50 for the first time in months, or at 52.1 on expectations of 50.0, and up from 49.7 last, although more disturbing was the ongoing collapse in German manufacturing which dipped from 46.8 to 46.3, on expectations of a rise to 47.2. French manufacturing data did not help posting a tiny rise from 44.5 to 44.6, missing expectations of a 45.0 print. Economic data was further confounded when Spain released its quarterly home price update, which dipped 3.8%, accelerated last quarter's -3.3% drop, and sliding by a massive -15.2% in Q3, faster than the -14.4% drop in Q2, and confirming Spanish housing has a long way to go before it is fixed.

Then there was the announcement of yet another Eurozone summit, this time making vague promises about what a monetary union in Europe may look like years into the future. After all, anything to pad the Belgian caterers taxpayer funded year-end invoice.

Net of all these data, the EURUSD pushed above 1.31 in the middle of the overnight session, only to slide to its lows in the 1.3070 area as US traders started trickling in.

After all that, sit back and watch for flashing red headlines with the words Fiscal Cliff, as they are far more important than any actual news, facts, or data.

More from DB's Jim Reid

After a week of very early nights to shake off the draining effects of the man-flu, I finally ventured out past 8pm last night and to the recording of BBC TV institution "Have I Got News for You". It airs tonight so for those of you in the UK that want to look incredibly impressive in front of your partner while on the sofa this evening then I'm happy to divulge the obscure answers to the missing word round to anyone who emails me.

One missing word game the market is struggling with at the moment is 'Fiscal Cliff to be resolved by xxxxxx on xxxxxx'. Insert your own guesses here. Indeed yesterday brought us another day where hopes of an imminent resolution faded as a 50min face-to-face meeting between Boehner and the President showed no signs of progress. Both sides made little comments after the meeting other than saying that the meeting was “frank” and the “lines of communication remain open”. Boehner yesterday said that the President hasn’t yet offered up a plan that is truly balanced and begins to solve our spending problem while the House Democratic leader Nancy Pelosi again defended by focusing on the negative side effects of cutting your way to reduce the deficit. Boehner is scheduled to return home to Ohio today and Obama said talks are still work in progress. An ABC News/Washington Post poll released on Wednesday noted that 49% of Americans approve Obama’s handling of the talks versus 25% who say Boehner is doing a good job. A Bloomberg poll found that nearly 2/3 of respondents (including nearly 50% of Republicans) believe Obama’s re-election gave him a mandate to seek higher taxes on the wealthy. A WSJ/NBC poll released on Wednesday noted that more than 75% of Americans (including 61% Republicans) said they would accept raising taxes in order to avoid a cliff.

US equities started the day on a slightly positive footing before fiscal cliff worries started to weigh on sentiment. The S&P 500 (-0.63%) fell for the first time in 7 days although it closed 0.2% off the lows as headlines of the unscheduled White House meeting between Obama and Boehner lifted the mood slightly into the close. US data flow was decent with initial claims (343k v 369k) down more than expected and core retail sales (+0.7% v +0.4%) printing above market consensus. Treasuries came off the highs in yields but still close the day moderately weaker. The UST 10yr yield climbed 3bps higher to 1.730% while a 30-year UST auction yesterday which was priced at higher yield than expected. Also interesting to see that despite the cliff uncertainties the AAII Bullish investor sentiment rose for the fourth consecutive week to hit the highest since mid-March.

Turning to overnight markets Chinese equities are rallying strongly with the Shanghai Composite (+3.7%) up by the most in about 3 months. A slightly better than expected December HSBC China Flash PMI (50.9 v 50.8) is probably helping as the series stayed above 50 for the second straight month. Elsewhere the Hang Seng (+0.6%) is also higher and the Nikkei (-0.06%) is off its earlier lows. In terms data we saw Japan’s Tankan Business confidence drop to a 3- year low. Japan’s election this coming Sunday will be the main event this weekend with Abe’s LDP currently projected to win more than 300 of the 480 seats in the lower house (Kyodo News).

On to rating matters its worth mentioning that after 779 days the UK’s AAA rating outlook was again revised to back Negative (from Stable) by S&P yesterday. The rating was placed on Negative outlook back in May 2009 before it was lifted back to Stable in October 2010 but as we stand the agency thinks there is a 1/3 chance of a downgrade if the UK’s economic and fiscal performance disappoints relative to their expectations. According to the agency UK debt/GDP ratio is expected to rise in 2015 before declining again and they also noted that growth or employment shocks could pressure government finances further. Markets reaction to this was fairly muted overnight.

Staying in Europe, Eurozone finance ministers finally approved EU49.1bn in aid payments to Greece. Of these, EU34.3bn will be released within the next few days while the rest will be handed out in Q1 next year. Elsewhere, DB’s Gilles Moec noted that newly agreed Single Supervisory Mechanism (SSM) was a major concession to Germany, who wanted to keep its network of saving banks and Landesbanken out of direct federal supervision. However, as a concession to France (which was in favour of universal federal supervision), the ECB will retain the power to intervene in any bank and give national supervisors instructions. To separate the ECB's supervisory and monetary policy function a supervisory board within the ECB will be created, to which non-Eurozone countries willing to participate in the SSM would have a voting right. However, the ECB governing would retain the right to veto the decisions of the supervisory board. The European Banking Authority (EBA) will remain in charge of defining the supervisory rulebook for the EU27. Timing wise it is unclear on when the system could be in place. It states that the ECB “will assume its supervisory tasks within the SSM on 1st March 2014 or 12 months after the entry into force of the legislation, whichever is later, subject to operational arrangement”. Since the institutional process itself could be long this means delays are quite possible and therefore Gilles think March 2014 is therefore purely indicative.

Moving on to today, flash PMI readings from France, Germany and the Eurozone aggregate will be the main focus. In summary the market expects a modest improvement but these readings will still largely remain in contraction territory. The only exception here being Germany’s services PMI which consensus is calling for a 50.0 print today (from 49.7 in November) for the German services PMI which would be the only exception. The ECB will publish its financial stability review and we will also get CPI data for the Eurozone.

Meanwhile in the US, inflation and industrial production are the key releases.