Futures Slide In Delayed Shutdown Response

If yesterday was the paradoxical government shutdown "relief rally" pushed higher by a last minute VIX smashing ramp, today reality is starting to set in and global stocks and US futures are set to open lower. The FTSE MIB remains the only European bourse to trade in positive territory in today’s session, having touched upon 2 year highs as it is expected the political tumult that threatened to cause a collapse of the Italian government will be resolved today even as the latest news indicate Berlusconi's PDL will support the Bunga godfather after all. Other European equities have failed to benefit from this as market participants remain cautious ahead of the ECB rate decision today when Draghi may or may not (most likely) announce a new LTRO.

Assisting the down side is negative news for large cap stocks with a number of related companies moving in sympathy. Tesco’s poor earnings report has weighed heavily on the FTSE 100 and other Consumer Goods related stocks, making that sector the worst performing in the European morning. Similarly the DAX is weighed upon by Deutsche Lufthansa, which was downgraded by Deutsche Bank in the mornings most significant broker move. 

Despite the cautious sentiment Financials are the best performing sector, as the banking members of the MIB outperform and participants anticipate the potential of ECB’s President Draghi indicating new liquidity measures in his post rate decision press conference.

Of note today is the ADP employment report. The report takes on added significance considering it’s likely that the release of the  BLS’ nonfarm payrolls (originally scheduled for Friday) will be delayed due to the government shutdown. Reports suggest that the BLS has yet to finish compiling the NFP, confirming a September 10th memo from the BLS’ commissioner that “all survey and other program operations will cease and the public website will not be updated” in the event of a government shutdown. During the last government shutdown in Dec95-Jan96, the December employment report was delayed for two weeks.

Overnight news bulletin from Bloomberg and RanSquawk

  • Still no end in sight for the partial US government shutdown despite a White House spokesman indicating that Obama is willing to compromise.
  • Conflicting reports are seen ahead of the Italian PM Enrico Letta's confidence vote in parliament today.
  • Markets are looking ahead to the ECB rate decision, while expectations are that rates will remain unchanged there is an outside chance of an indication of a new LTRO at Draghi's press conference.
    • ECB will keep its main refinancing rate unchanged at a record low 0.5% today, while Draghi will likely hold off from pumping more cash into the currency bloc’s financial system as long as  the threat of ECB action keeps rates under control  
  • Treasuries gain as partial shutdown of U.S. government shows no signs of ending quickly and as Italian prime minister Enrico Letta headed toward a victory in a confidence vote.
  • The U.S. has started using final extraordinary measures to avoid a breach of the nation’s debt limit, Treasury Secretary Jacob J. Lew said as he pressed Congress to increase borrowing authority “immediately”
  • Japanese Prime Minister Shinzo Abe’s reflation campaign shifted to structural domestic reforms after he unveiled a stimulus package offering a short-term cushion for the first sales-tax rise since 1997
  • Australia Reserve Bank Governor Glenn Stevens omitted any mention of having scope for further monetary easing for the third policy meeting in a row. Traders are taking that as a green light to drive the local currency higher
  • Sovereign yields mostly lower, peripherals spreads wider, Nikkei drops 2.1%, Asian indexes other than Chinese lower. European stocks, S&P 500 futures down. WTI crude, copper and gold rise

Asian Headlines

Chinese President Xi Jingping said China is determined to stabilize growth and focus on quality and efficiency of growth. Xi further stated that emerging markets should boost risk preparedness and that developed economy policies should avoid negative spillover.

EU & UK Headlines

Conflicting reports are seen ahead of the Italian PM Enrico Letta's confidence vote in parliament today. Italian newspaper ANSA initially reported that around 25 members of the PdL had decided to back Letta and support the coalition rather than voting no confidence alongside party leader and former PM Burlusconi. More recent reports have stated that the PdL is united in support of Berlusconi and against the current government. Letta holds a firm majority in the lower house, but will require at least 20 opposition votes in the Senate to retain governing power.

UK Construction PMI (Sep) M/M 58.9 vs. Exp. 59.5 (Prev. 59.1)

All three sub-sectors of construction grew last month with the sharpest rise in housing since November 2003. Germany sells EUR 4.056bln in 2.00% 2023, b/c 1.3 (Prev. 1.3) and avg. yield 1.79% (Prev. 2.06%), retention 18.8% (Prev. 18.48%)

US Headlines

US President Obama is willing to work on a budget compromise, according White House spokesman Jay Carney. Carney added that the won't negotiate with congress under threat and that Congress has a duty to pass budget bills. US Treasury Secretary Lew said the Treasury has begun using final extraordinary measures to maintain borrowing authority. Lew added the US will exhaust extraordinary measures no later than Oct. 17, leaving the government with about USD 30bln in cash. Lew further stated the government shutdown will not impact projections materially unless it continues for extended period.

Equities

The FTSE MIB is the only European bourse trading in the green as the political tumult seen in the early part of the week seems to be on the road to resolution as some of former PM and PdL party leader Berlusconi's followers are reported to have separated to support current PM Enrico Letta.

Microsoft - According to sources, three of the top 20 investors in the co. are lobbying the board to press for Bill Gates to step down as chairman of the software company he co-founded 38 years ago.

FX

EUR/USD traded steady this morning, as market participants remain reluctant to commit to positions of the key ECB meeting, however shorter dated implied vols are bid and 1m is at its highest level since early September, indicating heightened risk surrounding the even. In terms of option expiries, majority are centered around 1.3200 level. GBP maintains early gains despite a momentary down tick following disappointing Construction PMI data as EUR/GBP is seen lower ahead of the ECB's rate decision.

Commodities

US API US Crude Oil Inventories (Oct) W/W 4500K vs. Prev. -54k

- Cushing Crude Inventory (Oct 01) W/W -83K vs. Prev. -395K
- Gasoline Inventories (Oct 01) W/W 326K vs. Prev. 341K
- Distillate Inventory (Oct 01) W/W -157K vs. Prev. 485K

Russian September oil output at post-Soviet record of 10.526mln bpd.

Even though spot gold is trading higher, the location of 21DMA (1340.28) and 100DMA lines (1338.40), where the shorter dated moving avg. looks set to cross the longer-dated one indicates that there is scope for prices to head south. This morning has seen continued bearish comments on gold, the latest forecasts from Bureau of Resources and Energy Economics show that gold is expected to trade at USD 1275/oz in 2014 vs. USD 1439/oz in 2013 and analysts at Citigroup expect gold to find base at USD 1100-1200/oz.

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We conclude, as usual, with DB's Jim Reid summary of overnight events:

Global risk markets have largely recovered from the risk-off tone that prevailed at the start of the week when fears of a government shutdown and to a lesser extent, Italian politics dominated sentiment. Indeed, the S&P500 (+0.8%) finished yesterday not too far off its level seen at this point last week – and it’s a similar story across US IG, European iTraxx, Stoxx600, EURUSD and 10 year UST yields which all closed at levels similar to those seen one week ago. One of the worst performers over the last week has been gold, which slipped back below $1300/oz yesterday and is down around 3% over the past week.

Looking at our screens this morning, Asian equities are trading with modest gains in the KOSPI (+0.2%) and ASX200 (+0.2%). The Hang Seng (+1.1%) is leading this morning’s gains but it’s partly a case of “catch up” after being closed yesterday for Chinese National Day holidays. A stronger yen (USDJPY - 0.3%) is weighing on Japanese stocks and there are probably some aftereffects from Abe’s decision on Tuesday to hike sales taxes. S&P500 futures are down 3pts (or -0.15%) this morning while Asian credit is trading around 1-2bp firmer with some new shorts being entered following a decent performance yesterday. 10yr yields are close to unchanged at 2.65% overnight after yesterday’s ISM data (56.2 vs 55.0 expected) contributed to a 4bp rise in yields.

There are an increasing number of political analysts suggesting that the US government shutdown could now last for greater than a few days. Some are expecting that the shutdown may end up being folded into the looming debt ceiling debate. Treasury Secretary Jack Lew warned overnight that the treasury has begun using “final extraordinary measures” to avoid breaching the nation’s debt limit. In a letter addressed to Republican House Speaker Boehner, Lew repeated that the measures will be exhausted no later than October 17th. In terms of the continuing resolution, there are now around 12 House Republicans who say that they will back a “clean” bill (i.e. without provisions to defund/delay Obamacare) that would bring the shutdown to an end, according to the Washington Post. In theory, a clean bill could pass with just 17 Republican votes if all 200 Democrats in the House voted in favor of it and a vote were to take place. However, supporters of a clean continuing resolution are so far relegated to Republicans from the Northeast and California – which may not be a reflection of the broader House Republican conference (Washington Post). While a vote on a clean CR bill may or may not take place, Republican House leaders were busy yesterday introducing a series of separate bills to restart funding for national parks, veteran services and services in Washington DC. The bills required a two-thirds majority approval in the House, which they failed to achieve late last night.

Continuing on the political theme, Italian bond yields rallied 15bp yesterday after further talk of splintering within the ranks of Berlusconi’s PDL party. The PDL’s party secretary Alfano, who stepped down from the coalition cabinet last week, said that Prime Minister Letta will get the backing of the PDL party, potentially without Berlusconi’s blessing, in a Senate confidence vote. A confidence vote could take place as early as today. Letta rejected the resignations of Alfano and Lupi and the three other PDL ministers on Tuesday, a signal that he may value their public backing (Reuters).

Briefly previewing today’s ECB Governing council meeting, DB’s Gilles Moec and Mark Wall believe it will be easier for the ECB to convey its prudent, dovish message to the market than in the last two months. Although the recovery continues, the pace of “positive surprises” in the dataflow has eased somewhat. Furthermore, political risks (Italy, German Constitutional Court decision on OMT) have resurfaced in investors’ focus. Another LTRO rather than a rate cut would increasingly be the ECB’s weapon of choice if economic and financial conditions were to sour, but Moec and Wall think the bar for the Governing Council to move from verbal steering to actual decisions is very high. As a result, they think that another LTRO is not imminent - although it’s fair to say that market anticipation of some form of liquidity boost for European banks has been increasing.

Also worth watching closely is today’s US ADP employment report. The report takes on added significance considering it’s likely that the release of the  BLS’ nonfarm payrolls (originally scheduled for Friday) will be delayed due to the government shutdown. Reports suggest that the BLS has yet to finish compiling the NFP, confirming a September 10th memo from the BLS’ commissioner that “all survey and other program operations will cease and the public website will not be updated” in the event of a government shutdown. Indeed, during the last government shutdown in Dec95-Jan96, the December employment report was delayed for two weeks. In terms of today’s ADP, consensus expectations are for a gain of +180k, but we note that the correlation between ADP and nonfarm payrolls has been patchy on occasion.

For example, the ADP report showed a gain of +198k in July, which was more than 90k higher than the BLS nonfarm payrolls report of that month (+104k). Looking to the day ahead, Italian Prime Minister Letta is scheduled to speak at 9:30am local time before the upper house to make a case that his coalition deserves to maintain its mandate to govern. A formal confidence vote may come afterwards. The focus will then turn to the ECB Governing Council meeting which will be followed shortly by Draghi’s press conference. In the US, the ADP employment report will be the main data release. The latest US weekly mortgage applications are also scheduled today. Apart from Draghi, other central bank officials lined up to speak include the Boston Fed’s Rosengren (a FOMC member). Bernanke speaks today on the topic of “Community Banking in the 21st Century” after the market close.

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