Quad Witching Cliff-faller

It may not be apparent immediately, but in the aftermath of last night's epic collapse in fiscal cliff negotiations, which incidentally was perfectly obvious to anyone with half a brain and who experienced last summer's debt ceiling fiasco, which sadly excludes all paid political and financial - including sellside - commentators, all of whom expected a prompt resolution to this polarized issue as recently as a week ago, there is major behind the scenes panic.

Because while banks would write profuse, long-winded essays to explain the logic and rationality of the "deal", now that they are all faced with adjusting their narrative the best they can come up with are two sentence fragments such as this one from Citi's Steven Englander "Problem is that it is the right wing of the Republican Party that wouldn’t give Boehner their support, making it less likely that he could win broad support among Republicans for a compromise with the White House. Also he will have to spend next couple of days negotiating with both his own party and the Democrats without knowing how much he can deliver." The answer: nothing at all. In fact as Scott Rigell said “I’m not sure the people who have been up here 20 or 30 years really understand what the next iteration of this process is”.  He is speaking for pretty much everyone else who has now been made a total fool by the Black Swan that is Congress.

Furthermore, now that the leadership of the GOP is in limbo, following the not so silent conservative coup within the GOP, one can not only forget a deal being cut in 2012, but most likely there will be no deal at all until the hard deadline - that of the debt ceiling some time in March, which will be breached next week, but which the Treasury can extend for three months as a result of plundering the G-fund all over again. The implication, as we showed yesterday, is that a 3 month delay assures a US recession, and a ~20% or so minimum correction in the stock market, which has been priced for absolute perfection for months, and which will once again have to be used by Wall Street as a means to get a consensus out of DC. Just as we predicted over a month ago.

Reality finally penetrating through the market's thick skull of complacency has meant a decline virtually around the globe in all asset classes: Asian equities have been volatile but are trading weaker led by a 0.85% drop in the Hang Seng while 10yr UST yields have rallied 4bps to 1.756% as we go to print. Gold continues to underperform and is down to $1642/oz (-0.3%) overnight and is poised to finish lower for four straight sessions in its longest losing streak in more than 2 months.

The point is, however, that stock will be much, much lower by the time it all ends, unless of course, as we also jokingly (but now appears far more probable), Congress simply punts to Bernanke who has no choice but to do QE5 in the next few weeks to avoid what would now be a 5% market crash (where everyone is levered to the gills).

Finally while we may have avoided the Mayan apocalypse, we do have a quad witching and a NASDAQ rebalance to look forward to. Enjoy!

Some other overnight news via BBG:

  • Britain’s GDP rose 0.9% Q/q, down from previous estimate of 1%, while the deficit excluding bank support was GBP17.5b vs. GBP16.3b
  • U.K. banks, under pressure from the Bank of England to increase capital, may do exactly what the central bank doesn’t want them to do: Cut lending
  • UK current account -GBP12.8 billion vs -GBP14 billion exp.
  • The proposal by a Bank of Japan board member to scrap interest paid on lenders’ deposits raises the prospect of a flood of cash into a bond market where yields are near a nine-year low
  • Italian consumer confidence rose from 84.9 to 85.7, higher than consensus 85.1. No really.
  • Sweden sees 2013 GDP growth of 1.1%, versus 2.7% previously
  • Norwegian unemployment rises to 2.4%, above expectations of 2.3%

Busy day with lots of US events, all of which are completely irrelevant to the GETCO algos who are now merely looking for their next opportunity to flash crash futures:

  • 8:30am: Chicago Fed Nat Activity Index, Nov. (prior -0.56)
  • 8:30am: Personal Income, Nov., est. 0.3% (prior 0.0%)
  • Personal Spending, Nov., est. 0.4% (prior -0.2%)
  • PCE Deflator M/m, Nov., est. -0.1% (prior 0.1%)
  • PCE Deflator Y/y, Nov., est. 1.5% (prior 1.7%)
  • PCE Core M/m, Nov., est. 0.1% (prior 0.1%)
  • PCE Core Y/y, Nov., est. 1.6% (prior 1.6%)
  • 8:30am: Durable Goods Orders, Nov., est. 0.3% (prior 0.0%, revised 0.5%)
  • Durable Goods Ex-Transportation, Nov., est. -0.2% (prior 1.5%, revised 1.8%)
  • Capital Goods Orders Non-Defense, Ex-Aircraft, Nov., est. 0.0% (prior 1.7%, revised 2.9%)
  • Capital Goods Shipments Non-Defense, Ex-Aircraft, Nov., est. 0.8% (prior -0.4%, revised -0.1%)
  • 9:55am: U. of Michigan Confidence, Dec. final, est. 75.0 (prior 74.5)
  • 11:00am: Kansas City Fed Manufacturing Activity, Dec. est. -5 (prior -6)

And a more expansive recap from DB's Jim Reid

So you're all still there? Haven't you something more interesting to do in the last few hours of civilisation? To be fair the same could be said of us. But stoically we all carry on. However judging by the thousands of out of office messages I got yesterday many people have now left to prepare for Xmas/the apocalypse (delete as appropriate).

To be fair when I woke up this morning to find that overnight S&P futures had at one point slumped 50 points I thought that doomsday was starting. Yes we've seen a stunning development overnight to the fiscal cliff story with a chaotic delay to the scheduled House vote on the GOP’s ‘Plan B’ fiscal bill. Before we detail this, this will be my last contribution to the EMR this year but Anthony and Colin will keep publishing over the Xmas period to keep us up to date with the latest fiscal cliff developments. We would normally have paused by now but US politicians have kept us honest up until the bitter end and look like keeping the guys busy next week. So happy holidays to everyone from me and many thanks for reading in 2012 and for the support and interaction. Also thanks to Colin and Anthony for their invaluable contribution to this document. It couldn't be done without them.

Assuming the end is not nigh, see you all in the second week of 2013, as on Boxing Day I'll be off to slide down mountains in the name of fun for 12 days. So back to the dramatic overnight news. After a quick huddle in Boehner’s office, the House Speaker eventually scrapped the vote conceding that he didn’t have enough support from his Republican caucus to pass the bill. In a brief statement afterwards, Boehner said that “now it is up to the President to work with Senator Reid on legislation to avert the fiscal cliff”. Perhaps indicative of the current state of talks, Republican congressman Scott Rigell said that “I’m not sure the people who have been up here 20 or 30 years really understand what the next iteration of this process is”. In a press release, the White House said that Obama was still “hopeful” for a deal.

So cliff clock continues to tick and a deal before the Christmas break is now looking increasingly unlikely. Indeed the Senate will meet briefly today but will not reconvene until next Thursday (27 December). Similarly the House will also not meet again until after Christmas and the hope is that there will be bipartisan agreement then to avoid the fiscal cliff.

However if the Republicans weren't prepared to support a bill raising taxes for million-dollar annual earners, is compromise now getting much less likely? Are we heading over the cliff in a dramatic fashion? Or is this more a failure of leadership from Boehner? I have never known such a big story to break when no-one is really watching due to the holiday season. Even in the darkest days of the financial crises there did seem to be a 'bad news' amnesty as we approached Xmas. This uncertainty is pressurising markets overnight. As we said at the top S&P futures plunged nearly 50points to reach a low of 1392 after the negative headlines before recovering to 1423 as we type although there were also chatter of ‘fat fingers’ behind the dive in stocks. Asian equities have been volatile but are trading weaker led by a 0.85% drop in the Hang Seng while 10yr UST yields have rallied 4bps to 1.756% as we go to print. Gold continues to underperform and is down to $1642/oz (-0.3%) overnight and is poised to finish lower for four straight sessions in its longest losing streak in more than 2 months.

In the currency space, the JPY (+0.4%) continues to rally against the USD following yesterday’s BoJ meeting. The Nikkei reported overnight that the BoJ "appears certain to embrace an inflation target" with the question now being the target rate, the time frame and accountability (Nikkei). Cliff concerns are also lifting market volatility into year end with the VIX up 13.5% in the last 2 days.

Fiscal cliff aside, yesterday’s US dataflow made for more encouraging reading. The final Q3 GDP was revised up 0.4 ppt to 3.1% due to a combination of stronger personal consumption (1.6% vs. 1.4% previous), net exports (-$395B vs. -$403B) and government (3.9% vs. 3.5%). Inventories ($60.3bn vs. $61.3bn) were only revised slightly lower. The Philly Fed's manufacturing index recovered in December (8.1 vs -3.0 expected and -10.7  previous) driven by new orders and shipments. Existing home sales topped expectations in November (5.04 million vs. 4.90m expected), resulting in a 5.9% increase in sales volumes for the month.

Finally, jobless claims increased to 361k vs. 344k the previous week, settling broadly at the average that was recorded prior to Hurricane Sandy.

Away from the US news flows remain fairly quiet. In Spain, Catalan President Artur Mas said he would work with the Catalan Republican Left, or the ERC party to push for a referendum on independence from Spain in 2014 (Reuters). In Italy, the Italian senate approved the 2013 budget law and the bill now heads to the Chamber of Deputies where it is due to be passed either today or Saturday. PM Monti is reportedly scheduled to address the Italian public over the weekend but is also set to speak at the Conference of Ambassadors in Rome later today.

Looking at the day ahead, the market’s reaction to the latest fiscal cliff drama will likely be the main focus on what is likely going to be a thin volume day for trading. In terms of data, France’s business confidence and German/Italian/UK consumer confidence surveys are scheduled in Europe. In the US, November’s durable goods orders and personal spending are the data points of note.



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