New Year Euphoria Fading

The bipolar mood swing over the short-term band aid Fiscal Cliff non-solution may be over, and finally the market, which yesterday saw the official breach of the debt ceiling on the final day of 2012 on paper, may be starting to look forward 58 days to that day in February, (or more likely March), when the real catalyst as we have said all along- the increase of the US debt ceiling by another $2.4 trillion - has to be resolved. Futures are down a modest 5 points even as the EURUSD slide continues now that year end window dressing repatriation means European banks no longer need to show the currency on their books - at some point the EURUSD-ES correlation algos will kick in but not yet. Keep in mind that in the summer of 2011 the debt ceiling negotiations started some two months before the D-Day in early August, this time around politicians, who have learned nothing, will likely leave all debate until the very last moment once again, as the democrats assume the GOP will fold like a cheap lawn chair once again, even as the tensions at the GOP to do just the opposite hit a fever pitch. Which is why not even Goldman Sachs, as confirmed in a note by Alec Philips last night (coming shortly), cares to predict what (or when) the "debt ceiling 2013" outcome will be.

For those (few) who care about actual newsflow, here is a brief recap from Citi:

S&P 500 equity futures are trading lower this morning (-3.90), following the strong rally that markets have experienced as a result of fiscal cliff aversion and ahead of numerous macro data points due out later this morning. European equities are trading broadly lower, as investors exhibit caution ahead of unemployment data out of the US (ADP and NFP) and the continued US budget negotiations that will take place in the coming weeks.

European markets losing some ground this morning after the strong rally yesterday. Eurostoxx trading down 50bps, FTSE100 down ca. 10bps. The Swiss market outperforming the broader European markets as it catches up in its first trading session since the 28th of December. Risk off the more general tone in the markets as future concerns regarding U.S. spending cuts and increased noise regarding a potential ratings cut begin to surface with some negative Moody’s comments on the tape yesterday.
So more of a risk-off sentiment in Europe today and we see a small correction of some of yesterday’s moves. Miners the biggest underperformer today, currently trading down 60bps. Some negative comments on the tape from the Rio Tinto Iron Ore CEO, stating that the current spike in Iron Ore prices is only temporary. Utilities and Chems also underperforming this morning, K+S putting some pressure on the sector, we have downgraded the stock to Neutral and taken down our TP to €38 post the announcement of the Canpotex / Sinofert deal. Healthcare, +1.2%, the clear outperformer this morning but driven higher by the Swiss names in the sector (Novarits, Roche and Sonova). Had the first of the numbers in the retail sector this morning with Next reporting. Small beat mainly on the directory buesness and should see consensus upgrades of about 2/3%. Big week in UK retail reporting starting next week with Morrison on the 7th, Sainsbury on the 9th and  Tesco on the 10th of January.
On the macro front as expected, Norwegian PMI was basically unchanged in December (50.0 vs. 50.2 in November), and hence continues to signal stagnation in Norwegian industry. This is the second consecutive month with a reading of 50, and follows two quarters of contracting manufacturing activity (according to PMI readings). German Unemployment rises less than expected, +3k vs +10k expected.
In emerging, mkts mixed with CEE tracking developed Europe moves slightly lower, SA (-0.1%) on profit taking in miners following yday's beta rotation but outside of that it feels like business as usual with some of last yr's offshore favourites still posting new highs (Tiger Brands, Vodacom etc) as funds continue to use fresh inflows to replicate existing portfolios; Russia (-0.1%) too seeing a bout of profit taking in the mining space, the index supported by financials which are still catching a bid despite some strong moves higher yday. Turkey (+0.3%) at fresh highs with banks (+0.6%) buoyed by the govt's decision yday to cut the withholding tax on long term deposits, which in theory should help them decrease duration mismatches on the b/ce sheet. Volumes picking up, now at 0.8x adv (Vs c.0.6x yday) helped by a resumption of passive inflows into the region.

On the macro front, the German Dec unemployment report was in line with economist expectations (at 6.9%), while Spain’s Dec Unemployment report was better than expected (at -59.1K vs. consensus of 62.5K). Asian equity markets finished higher, though gains were capped by lower oil prices and profit taking from yesterday's rally. Australia extended gains (+0.82%), as miners advanced on higher commodity prices. Japan and China were closed again for the New Year Holiday.

On today’s macro front, look for: MBA Mortgage Applications (07:00), the ADP Employment Report (08:15), and Initial/Continuing Jobless Claims (08:30). FDO reports prior to the market open, while SONC reports following the market close.

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Sadly, as in the two months preceding the New Year and the Fiscal Cliff can kicking non-deal, it is once again the case that the market will ignore all macro news, and cash flow (whereever it can actually be found) developments for as long as possible, as those are indicators of reality, and certainly not of some mutated, twisted market where "valuation" is determined by just how many VIX futures a central bank may sell at any given time. Instead what the market will again focus on is the straw man of the approaching debt ceiling, which eventually will pass of course, although this time with far more kicking and screaming by the market.

In the meantime, we look forward much more to tomorrow's CFTC COT report than the NFP jobs number, and especially the VIX futures net non-commercial spec position. Following this week's euphoria, there must be almost no more VIX futures left to sell.