Overnight trading over the past week has been a bipolar affair based on algo sentiment about what is coming out of D.C. But which the last session was optimistic for some inexplicable reason that a deal on both the government shutdown and the debt ceiling out of DC was imminent, today any optimism is gone in the aftermath of the latest comments by Boehner on ABC, in which he implied that a US default is not unavoidable and that it would be used as more political capital, as it would be once again blamed on Obama for not resuming negotiations. As a result both global equities and US futures are down sharpy in overnight trading. And since the government shutdown, better known as a retroactively paid vacation, for everyone but the Pentagon (whose 400,000 workers have been recalled from furlough) continues it means zero government economic statistics in today's session with the only macro data being the Fed-sourced consumer credit report at 3 pm. This week also marks the unofficial start of the Q3 reporting season in the US with Alcoa doing the usual opening honous after the US closing bell tomorrow. JPMorgan’s and Wells Fargo’s results on Friday are the other main ones to watch to see just how much in reserves are released to pretend that banks are still making money.
As usual, expect disinformation leaks that send the market sharply higher throughout the day, which however will only make the final outcome that much more painful, because as during every US government crisis in the past, stocks have to plunge so they can soar again.
Overnight news bulletin per Bloomberg and RanSquawk
- Treasuries gain as U.S. House Speaker Boehner says he doesn’t have the votes for a clean debt limit increase and that the country could default if Obama doesn’t negotiate.
- The Obama administration has said it won’t negotiate with Republicans over funding the government or raising the debt ceiling; Treasury’s Jack Lew says limit needs to be raised by Oct. 17 to avoid default
- There has still been no deal reached between the Democratic-led Senate and Republican House and the US government remains in partial shutdown until a continuing resolution can be passed through Congress. Moody's said US may continue payments after debt cap reached and that debt payments would leave creditworthiness intact.
- Crude futures trade negatively, both WTI and Brent see losses of around USD 1.00 as tropical storm Karen on the Gulf Coast dissipates into a depression and workers return to reopening platforms.
- Moody’ said it sees a “very low” chance the U.S. will default on its debt payments
- The World Bank lowered its forecasts for East Asia’s developing nations this year and next and said China may grow 7.5% this year, lower than an April forecast of 8.3%
- Sovereign yields mostly lower, peripheral spreads tighter. Nikkei falls 1.22%, leading Asian markets other than China’s lower; European stocks and S&P 500 futures decline. WTI crude, copper fall; gold little changed
- 3:00pm: Consumer Credit, Aug., est. $12b (prior $10.437b) Supply
- 11:00am: Fed to purchase $2.75b-$3.5b in 2020-2023 sector
- 11:30am: U.S. to sell $35b 3M bills, $30b 6M bills
Market Re-Cap from Ran
Risk averse sentiment has been seen across asset classes with no deal in place in regards to the US government shutdown with stocks and energy trading in negative territory while both Bunds and T-notes have seen gains in the European morning.
The combination of unfavourable interest rate flows and the demand for safe haven assets saw USD/JPY make a test on the 200DMA, which also prompted liquidation in long-Nikkei 225 positions (settled down 1.2%). Heading into the North American open, stocks trade lower by around a per cent with defensive sectors, Utilities and Healthcare the best performers. The demand for the above mentioned sectors supports the view that there is limited appetite for risk and instead market participants are more than willing to benefit from relatively high and stable dividend yield.
Despite USD weakness the energy complex sees losses, as the tropical storm Karen, in the Gulf of Mexico, calms to a depression, energy markets see downside as workers begin returning to platforms.
While the US government shut-down will continue to be the main focus, market participants will also await the kick-off of the latest earnings season, with Alcoa due to report after the closing bell on Wall Street on Tuesday.
World Bank cuts China 2013 growth forecast to 7.5% from 8.3% and said that China must contain credit growth, tighten financial supervision and rationalize municipal finances.
The Japanese government is considering revising investment policy for public pension funds, allowing the Government Pension Investment Fund to step up investment in shares of growing Co.s.
EU & UK Headlines
Eurozone Q2 GDP revised down to -0.6% Y/Y vs. -0.5% Y/Y, according to Eurostat Greek 2014 draft budget sees economy shrinking by 4% in 2013
- Unemployment rate at avg. 27% in 2013.
- 2013 net revenues EUR 47bln, EUR 1.5bln short of target.
- Shows growth next year
After opening lower stocks in Europe have settled into range bound price action. In terms of individual sectors Utilities are the only stocks to trade positively, followed by healthcare which sees only minor losses, a reflection of the lack of risk appetite in the European morning.
BlackBerry is in talks with Cisco Systems, Google and German listed SAP about selling them all or parts of itself, according to sources. The sources added, it is unclear which parties will bid, if any, but the potential technology buyers have been especially interested in BlackBerry's secure server network and patent portfolio. In a notable broker move IBM was cut to equalweight from overweight at Barclays.
JPY and CHF benefited from the flight to quality which was observed this morning in Europe and during the overnight session in Asia. So much so that the move lower by the spot JPY rate saw the major pair make a test on the 200DMA line to the downside which is seen at 96.67. As a guide, option related flow may gather momentum in the second half of the session, especially since there are a number of large expiring options clustered around 96.75 mark.
Crude futures trade negatively, both WTI and Brent see losses of around USD 1.00 as tropical storm Karen on the Gulf Coast dissipates into a depression and workers return to reopening platforms.
Goldman Sachs has adjusted its 2014 annual average WTI-Brent differential slightly wider to USD - 9.00bbl from USD - 8.50bbl previously.
Morgan Stanley lowers gold and silver price forecasts by 9-12% in 2015-17 and iron ore price forecasts reduced by 2-5% in 2015-17, UBS however changed its gold outlook to neutral from underweight.
India October-December gold imports are expected at 150 tons, according to All India Gems & Jewellery Trade Federation Chairman Soni.
* * *
Finally, the complete overnight market and news recap comes from DB's Jim Reid
As we enter week 2 of shutdown, the weekend news hasn't exactly encouraged hopes of an imminent compromise. House Speaker Boehner played hard ball on Sunday and said that the House would not back off in budget and debt ceiling discussions without concessions from the President on Obama-care. He also claimed that there are not enough votes in the House to pass a clean Continuing Resolution bill. This assessment, however, prompted a challenge from others, including Senator Charles Schumer, who believed that there are actually enough votes if the clean budget bill was put on the floor. There seems to be some support for this particular view as a Washington Post article overnight highlighted that 195 of the chamber’s 200 Democrats have signed a letter urging Boehner to allow a vote on a clean CR. This, combined with the 22 House Republicans who have signaled support for a clean resolution would give rise to 217 votes - just enough to win a majority vote in the 432 member chamber. Both houses of Congress will be back in session on Monday afternoon and developments on Capitol Hill will continue to dominate markets from here.
Turning to markets, the Asian session has kicked off the week on a softer tone overnight with major bourses down across the board. The Nikkei and the Hang Seng are down -1.1% and -0.7% respectively. S&P 500 Futures are also down by about -0.65%. Chinese and Australian markets are closed for holidays. Treasury yields are also a tad higher despite the softer risk tone with the 10yr up 1bps at 2.631% as we go to print. Asian credit spreads are trading slightly better with IG spreads generally 1-2bps tighter overnight although new issues will likely be the main focus this week as China emerges from its week long holiday tomorrow.
If one is trying to look for some good news it does seem that the longer this goes on, the less likely that the Fed are going to have enough 'clean' data to be confident enough to taper in December. However the December meeting is fairly late (17th and 18th) so there is some time for a successful resolution before it interferes with the data too much. We also have to consider whether the members of the FOMC have been scarred by the market reaction to the no September taper from some quarters and are perhaps more inclined to pull the trigger because of it. Nevertheless when everything is put in the mix, a December taper is more questionable than it was before the shutdown. On this theme it will be interesting to see this week's FOMC minutes (Wednesday) from the controversial September meeting. We should get more clarity on how close the call was which will give us some clues as to how they will vote in the future even if their opinions may have now been overtaken by events in Washington.
The Fed minutes aside there are over a handful of key US data releases expected this week although some of those might still end up being casualties of the partial government shutdown. The vulnerable reports include: US trade balance (Tue), JOLTs (Tue), Wholesale inventories (Wed), Monthly Federal budget (Thurs), Retail sales (Fri), PPI (Fri) and Business inventories (Fri). On the other hand, we should get reports released as per scheduled for the following: Consumer credit (today), NFIB (Tues), Mortgage Applications (Wed), Weekly jobless claims (Thur), and the UofM Consumer Confidence (Fri).
Away from the US, we may see some focus be on the annual IMF and World Bank Summit on Tuesday. On the same day will also see the IMF release its latest World Economic Outlook. It will be interesting to see if the shutdown and debt ceiling gets a mention in the IMF’s latest assessment of US growth outlook. In Europe, we can expect Germany’s exports and factory orders as well as French trade data on Tuesday. This is followed by industrial production data from other parts of Euroland over the remainder of the week.
Last but not least this week also marks the unofficial start of the Q3 reporting season in the US with Alcoa doing the usual opening honours after the US closing bell tomorrow. That aside, JPMorgan’s and Wells Fargo’s results on Friday are the other main ones to watch out for this week although these could easily be overshadowed by the US budget deadlock if political leaders in Washington fail to make meaningful progress before then.