Earnings Season Starts With Government Still Shut; 9 Days Till The Debt X-Date

Markets are so obsessed by developments with the US debt ceiling, that absolutely nobody noticed that the Japanese Current Account (JPY152Bn, Exp. JPY520bn), Industrial Outuput in Spain (-2.0%, Exp. -1.6%), Factory Orders in Germany (-0.3%, Exp. +1.2%), Trade Balance in Germany (€13.1bn, Exp. €15.0 bn) and that the Jan-Aug tax revenue in Greece below expectations by 5.7%, all missed horribly, and that for all the talk of a European recovery (which was merely driven by a brief surge in Chinese credit spending making its way into the European pipeline) is once again fully and entirely premature. But with Congress on everyone's mind, even increasingly China and Japan, who cares about fundamentals: after all there is a Federal Reserve to mask the fact that nothing but liquidity injections matters. Even if that means a complete collapse in the actual economy as those separated from the Fed by one or more layers of banks, crash and burn.

Market ReCap via Ran

Despite stocks trading lower throughout the European morning, as fears of the political deadlock in the US having economic consequences grows and reports that future reliance on ECB funding may result in penalties for banks EU, financials were among the best performing sectors.

Reports that EU regulators overseeing next year’s stress tests are preparing to penalise lenders that continue to rely on ECB’s funding schemes resulted in the steepening of the Euribor curve. This was offset by bullish comments from Templeton’s Mobius on Greek and Portuguese banks, as well as the fact that Monti Paschi announced further measures to secure EUR 4.1bln in state aid. Nevertheless, despite USTs and Bunds also trading lower, concerns over potential implication of US failing to meet its financial obligations meant that money rates remained bid, with FT reporting that financial firms trading in US Treasury securities are preparing contingency plans in the event of a debt default.

The FTSE MIB is the only EU index to trade positively as its banking sector benefits from the aforementioned Monti Paschi restructuring plan as well as remaining up after the political turmoil has been resolved last week. Despite the cautious sentiment, EUR/CHF and USD/JPY traded higher, benefiting from favourable interest rate differential flows.

Going forward, market participants will digest the release of US NFIB and the release of the weekly API report. Also, Alcoa will kickoff the latest earnings season after the closing bell on Wall Street.

Overnight news bulletin from Bloomberg and RanSquawk:

  • Treasury yields modestly higher overnight as rhetoric between Obama, Republican leaders grows more divisive; note and bond auctions begin with $30B 3Y notes; yield 0.68% in WI trading after drawing 0.913% in Sept.
  • Senate Democrats are planning a test vote before the end of this week on a measure that would grant Obama authority to raise the $16.7t debt ceiling, probably for a year, unless two-thirds of both chambers of Congress disapprove
  • China and Japan, which together hold more than $2.4t in Treasuries, raised pressure on the U.S. to resolve a political impasse on its debt ceiling that threatens to destabilize global financial markets
  • Purchases of Canadian dollars by central banks totaled $16.8b in 2Q, while those for the Aussie were $13.5b, based on IMF data compiled by Nomura. No other currencies saw as much buying
  • Japan’s Government Pension Investment Fund, the world’s largest manager of retirement savings, needs to reduce the risk of losses on its bond holdings should interest rates start to rise as the economy improves, according to the head of an expert panel advising on public investments
  • Sovereign yields mostly higher, peripheral spreads tighter. Nikkei rises 0.30%, leading Asian markets higher; European stocks decline, S&P 500 futures flat. WTI crude, copper, gold rise
  • Moody's says the AAA rating and stable outlook for US reflects that default is an extremely unlikely event.
  • EU regulators overseeing next year’s long-awaited stress tests of the region’s banks are preparing to penalise any lender that remains reliant on the ECB’s landmark cheap funding scheme.
  • Alcoa and Yum! Brands kick-off Q3's earning season as they are due to report after the close on Wall Street

Asian Headlines

Chinese HSBC Services PMI (Sep) M/M 52.4 (Prev. 52.8)
China Q4 2013 economy may grow 7.6%, according to the State Information Centre

EU & UK Headlines

EU regulators overseeing next year’s long-awaited stress tests of the region’s banks are preparing to penalise any lender that remains reliant on the ECB’s landmark cheap funding scheme.

British Chambers of Commerce said British firms reported broad-based growth in business and confidence in Q3, pointing to a rise of around 1% in GDP.

UK RICS House Price Balance (Sep) M/M 54% vs. Exp. 45% (Prev. 40%, Rev. 41%), fastest pace of increase in 11 years.

UK house sales hit 4-year high in September.
UK BRC Sales Like-For-Like (Sep) Y/Y 0.7% vs. Exp. 2.0% (Prev. 1.8%), weakest since April.
UK BRC Total Sales Values (Sep) Y/Y 2.4% (Prev. 3.6%), weakest since April.

Italian Deficit to GDP (YTD) (Q2) 4.1% (Prev. 7.3%)

German Factory Orders (Aug) M/M -0.3% vs. Exp. 1.1% (Prev. -2.7%, Rev. to -1.9%)
German Factory Orders (Aug) Y/Y 3.1% vs. Exp. 4.0% (Prev. 2.0%, Rev. to 2.3%)

US Headlines

Moody's says the AAA rating and stable outlook for US reflects that default is an extremely unlikely event. However the FT reported that financial firms trading in US Treasury securities are preparing contingency plans in the event of a debt default. (FT-More)


A positive close in Asia was not carried over to the European session with all but one, the Italian FTSE MIB, trading in the red. The FTSE MIB mainly benefits from the fact that its third largest bank announced an improved restructuring plan to secure EUR 4.1bln in state aid. Financials are among the best performing sectors after two successive days which have seen bullish comments by US investors on prospects for the sector in the European periphery


Despite the risk averse sentiment as evidenced in lower trading stocks, USTs and Bunds traded lower which in turn saw USD/JPY benefit from favourable interest rate differential flows, which also saw the pair move above the key 200DMA line. Elsewhere, AUD and NZD benefited overnight following an improving NAB Business Confidence and an increased ANZ Job Advertisements. Elsewhere a brief spike lower was seen in GBP/USD when at 1040BST newswires reported a Bank of England LTRO announcement. However price action was quickly retraced as it was clarified that this was part of their regular operations and not anything new from the BoE.


Both Goldman Sachs and Credit Suisse see shorting gold as the best commodity trade and with Credit Suisse also recommending shorting iron ore. Credit Suisse analysts also note that PGMs will do well over the next year, led by palladium and then platinum. Commerzbank's Head of Commodities Research Weinberg, however, said he expects gold prices to rise and sees 'value' in industrial metals such as zinc, lead and copper.

According to the FT there is to be a big shake up in the US gas market as the northeast region of the country that is traditionally seen as the biggest area for consumption in the US is set to become the biggest supplier due to increased drilling in the area.

According to shipping data fuel oil supplies to Asia have risen to 3.7mln tons in November while Russia's Putin has called for other Asian nations to follow Russia by expanding the Northern Sea route as Russian companies have capacity to increase energy exports to the Asia-Pacific region.

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Deutsche's Jim Reid provides his complete summary of overnight events:

There is a growing concern that America may go beyond the 17th of October (the date Treasury Secretary Jack Lew originally said the US would hit its debt ceiling) without the debt ceiling being raised. Here it’s important to point out that this is not necessarily the disaster it may initially sound. First there is a growing feeling that the 17th is not a hard and fast date; with the math suggesting the Treasury may only breach the debt limit towards the end of the month. Perversely such a realisation is not helping the urgency of the resolution discussions and makes the probability of the shutdown extending beyond Oct 17th higher. Second if the US does hit its debt limit and goes into technical default this shouldn’t need to cause financial chaos as long as there continues to be an expectation that missed coupon payments will eventually be repaid within days or at worse weeks (i.e. a deal will eventually come). The problem comes as the longer we go past the debt limit date and the deeper in arrears the US government gets, the greater the chance of a sudden break in the system. No-one can really speculate as to when such a break would occur. Frank Kelly suggests that the next thing to watch for might be the expected upcoming vote in the House to pass a 6 month Continuing Resolution to reopen the government with a host of new proposals tagged on (such as on tax reform and the keystone pipeline). This vote is again likely purely symbolic (the Senate is unlikely to even table it for a vote) however it does offer a chance to see whether any more Republicans are defecting from the party line (in the last vote 6 opposed the bill, demanding a real solution). Timing of potential vote is unknown at this stage but the House will be meeting again today.

Turning to markets, Asian equities have been posting gains despite the S&P 500 (-0.85%) closing at the low’s yesterday. The Hang Seng (+1%) and Chinese A-shares (+0.6%) are outperforming this morning boosted by reports of PBOC liquidity injections. A-shares have reopened after a one week hiatus for National Day celebrations. Other regional indices including the Nikkei and KOSPI are up marginally as is the S&P 500 futures contract (+0.01%). Japanese current account numbers for August showed a deterioration in the overall balance to JPY152bn (vs JPY577bn previous month and JPY520bn
expected). Despite this, USDJPY is about 0.4% higher overnight.

Returning to yesterday, markets were again in controlled risk-off mode as they erased gains from last Friday. S&P 500 futures closed at the lows of -1% as Friday’s optimism that we would see a weekend budget deal evaporated amid another day passing without a softening in stance from either side. There was a small bounce in risk in the second half of the US session after reports surfaced that Senate Democrats could introduce legislation today that would give President Obama the authority to raise the debt ceiling for one-year, unless two-thirds of Congress disapproved. Reports suggest that more Republicans would be willing to vote for a bill of this type as it would not require a direct vote to raise the debt ceiling. Amid the risk off tone, government bond yields across the US and Euroarea firmed by 2-3bp. The USD index continued its slide against major currencies, closing below 80.0, thus benefitting gold (+0.92%) and crude oil (+0.2%). Credit markets were relatively stable, with cash spreads unchanged, supported by the drop in treasury yields.

With all the political event risks, the fact that today marks the start of the US Q3 reporting season has largely gone unnoticed. Alcoa starts the ball rolling with its earnings announcement post the US closing bell. The aluminium maker is expected to report a small YoY drop in revenue to $5.6bn, but EPS is expected to come in at 5.3c per share, or a 78% increase on the same period last year. As is usual, investors will be focusing on management’s commentary with respect to the outlook for alumina and aluminium demand.

Today’s data calendar will be mostly European-centric given that US trade numbers and the JOLTs job report (originally scheduled for today) have been postponed due to the shutdown. In Europe, the focus will be on French and German trade numbers for August and German factory orders. In the US, the NFIB small business survey is the only major data release of note. The Fed’s Pianalto and Plosser (non-voters) will be speaking on the outlook for the economy.