Double Whammy Of Debt Talk Breakdown And Chinese Economic Crunch Means Buying Euphoria Halted

In a world devoid for the past two weeks and certainly for foreseeable future of most US economic data (this week we get no CPI, Industrial Production and New Home Sales among others), markets are now reliant on China for an indication of how the economy is doing, which is why this weekend's weaker than expected Chinese exports (ignoring the fact that China trade data is largely made up) and higher than expected consumer price inflation (driven by higher vegetable prices), even as new yuan loans soared to CNY787 billion, well above the CNY675 billion estimate despite broader M2 slowing from 14.7% in August to 14.2% in September, means the Chinese economy is once again in a vice and following the summer's liquidity driven boost, is set to roll over. Which in turn means that once again the PBOC is flying blind: unable to inject more liquidity without risking broader inflation, while most indicators are already rolling over.

The disappointing Chinese data was also confirmed by weaker electricity consumption following the report by the NEA that September electricity consumption fell from 13.7% to 10.4% Y/Y, while the consumption by industry was even more pronounced dropping from 12.0% in August to 8.1% most recently.

In short, ugly and certainly rolling over Chinese economic indicators for the market to mull over on Columbus day, even though all this will be promptly forgotten once the Washington debt ceiling song and dance resumes and the now traditional 10:30 am surge grips the algotrons as the latest set of "imminent deal" rumors is unleashed.

US Government Shutdown Update:

Negotiations between the White House and Republicans in the House of Representatives over the budget have broken down. House Speaker Boehner said talks stalled after the White House rejected his initial offer for a six-week hike in the debt ceiling and new budget talks to reopen the government. The Senate also blocked on a 53-45 vote a Democratic plan that would have raised the debt ceiling until 2014, with no strings attached. (FT-More)

US Senate majority leader Harry Reid said he had a productive conversation with Republican McConnel and is optimistic for a 'positive conclusion' on debt limit and government funding. (Newswires)

Overnight news bulletin from Bloomberg and RanSquaw:

  • U.S. equity futures fall, JPY rises and gold strengthens as lack of resolve over U.S. debt issues drives investors to haven assets; China’s yuan rises to highest since 1993.
  • Today: U.S. marks Columbus Day holiday; ECB speakers; RBA releases minutes (tomorrow local time)
  • Euro-Area Aug. industrial production up 1% M/m vs est. 0.8% (prior -1.5%); IP M/m change was the highest since July 2011
  • U.S. lawmakers struggled to reach an accord on raising the nation’s debt limit and restoring government operations, spurring demand for safer assets such as JPY
  • SNB’s Jordan said central bank’s currency ceiling on the franc remains essential to protect the country’s economy
  • Finance chiefs from nations holding more than $1.3t of Treasuries signaled no plans to sell, expressing faith in the ability of the U.S. to pay its bills
  • Australia home-loan approvals dropped for the first time this year
  • China’s exports unexpectedly fell in September and inflation jumped on food prices, signaling constraints on the nation’s recovery
  • China new yuan loans top estimates as money-supply growth slows

Market Re-Cap

European stocks trade negatively as markets reacted to the disappointment of the US government being unable to break the deadlock in their debt ceiling debate and the continuation of the shutdown.

US futures erased all gains seen at the end of last week and this carried over into the European session with cash markets gapping lower at the open. The move lower in stocks was led by tech and financial sectors, with Infineon down over 3% after analysts at Bank of America cut co. to neutral from buy. While French software maker Dassault Systems shares fell around 9% after the company warned that its Q3 revenue and earnings were lower than previously expected, citing sluggish orders. A further reflection of risk averse sentiment is JPY strength in FX, which resulted in USD/JPY gapping lower at the open to trade below the 50DMA line.

Uncertainty over the looming debt-ceiling deadline has also pushed up money market rates, with USD FRA/OIS spreads bid and Eurodollar curve steeper in early trade. Higher rates have contributed to the pull back of gains in fixed income products seen in early trade, with bunds, trading higher by 11 ticks in the first half hour of the session now seen lower by 9 ticks.

Asian Headlines

Chinese Trade Balance (Sep) (USD) M/M 15.21bln vs. Exp. 26.25bln (Prev. 28.52bln)
Exports (Sep) Y/Y -0.3% vs. Exp. 5.5% (Prev. 7.2%)
Imports (Sep) Y/Y 7.4% vs. Exp. 7.0% (Prev. 7.0%)
Chinese PPI (Sep) Y/Y -1.3% vs. Exp. -1.4% (Prev. -1.6%)
Chinese CPI (Sep) Y/Y 3.1% vs. Exp. 2.8% (Prev. 2.6%)
China's National Bureau of Statistics said CPI pushed up by food, fuel, tourism prices.

PBOC deputy governor Yi Gang said the most recent economic data indicate that the Chinese economy will continue to grow at a steady pace in the near term and is on track to reach this year's growth target of 7.5%. Yi Gang added that the Chinese economy maintained a solid growth pace and real GDP grew by 7.6 Y/Y in H1 2013.

EU & UK Headlines

The ECB will ask large banks to introduce an additional equity capital buffer when it conducts its asset quality review of the Eurozone's 130 most important banks next year according to reports quoting ECB's Mersch.

According to sources, Italy, France and Germany are pushing to soften the criteria of ECB bank stress tests Italy wants to avoid shareholders and junior debt holders being hit if a bank needs to be recapitalized with public funds.

ECB's Bonnici says will cut interest rates if needed but impact would be limited and the ECB is prepared to go negative with deposit rate but have some complications. They are keeping an eye on the need for a LTRO.

The European Commission is in discussions with Spain and Ireland on how to ensure a smooth exit from their bailouts in the next months, but both may succeed without any special arrangements according to EU's Rehn. Ireland is on track to to leave its rescue program on December 15th as planned according to Irish PM Kenny.

The UK is blocking final approval of a powerful new supervisor for euro zone banks until it receives further guarantees that countries outside the currency union won't be disadvantaged.

US Headlines

The US sees the Columbus day national holiday meaning although CME Globex, New York and NYSE trading floor will run on a normal schedule, CME Foreign Exchange & Interest Rates are closed for trade.


US futures erased all gains seen at the end of last week and this carried over into the European session with cash markets gapping lower at the open. Technology is the worst performing sector as Infineon trades lower by 3% after being downgraded at Bank of America and Dassault Systems are seen lower by around 10% after reports that the company halved its Q3 revenue forecast, citing sluggish orders.The IBEX however trades with gains, benefiting from out performance by Acelormittal who were upgraded in a number of premarket broker moves.

Microsoft's CEO search reveals board rifts, and outsiders include Ford's Mulally, Oracle's Hurd and Nokia's Elop according to sources

CME hiked margins on E-mini S&P 500, E-mini Nasdaq 100 and S&P 500 contracts effective October 15 2013. According to the reports, E-Mini S&P 500 futures margins have been hiked for specs by 10% from USD 3,730 to USD 4,125.(Newswires-more)

Peugeot Citroen is preparing a EUR 3bln capital increase in which Chinese partner Dongfeng and the French government would take matching stakes in the co. according to sources.


Foreign exchange moves have been relatively muted in the European morning, with JPY strength as a result of risk averse trade being the most significant move The USD/JPY pair briefly broke through the its 50DMA in early trade and has remained around this level. This has led to slight USD weakness and upside seen for EUR/USD and GBP/USD heading toward the US open.


Morgan Stanley says WTI-Brent gap should narrow this year and that Oct/Nov marks a seasonal low PT for WTI-Brent. Chinese imports are set for a record high in September, furthering the case for the nation to overtake the US as the world's largest oil importer.

Holdings in the SPDR Gold Trust fell to 890.98mt on October 11th, the lowest since February 2009.

China's oil, iron ore imports set records in September, copper at 18-month high.

Concluding the overnight event recap, here is DB's Jim Ried

Just when you thought it was safe to assume progress on the budget impasse, the weekend has proved to be frustratingly slow in terms of positive developments. Markets are responding accordingly with S&P 500 futures (-0.6% as we type) erasing most of Friday's gains as last week’s hope that we
would see a early-week deal has evaporated. Weekend negotiations on Capitol Hill shifted to the Senate after talks between John Boehner, House Republicans and the White House collapsed late last week. In their place, Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell have been spearheading the weekend dialogue. The basis of talks were around a “six-point fiscal plan” outlined by Republican Senator Susan Collins which was promptly rejected by Reid on Saturday. The six-point plan called for changes to the Obamacare laws including a delay to the medical devices tax and locking in a cut to federal spending at an annualised rate of $986bn for the first six months of fiscal 2014 – in return for extension of government funding for six months and the debt ceiling through to the end of January.

Democratic leaders have instead urged Republicans to support a clean bill to raise the debt limit. Nonetheless, Senate talks continued briefly on Sunday but a five-minute phone call between the two Senate leaders concluded with no sign that a deal to extend the debt ceiling and reopen government was imminent. Late on Sunday, Reid described the conversations with McConnell so far as “substantive” and that he remained hopeful of a positive outcome. We’ll hear more about this today.

Aside from the weakness in US equity futures, we’re also seeing pockets of softness in Asian equity markets including the KOSPI (-0.1%) and ASX200 (-0.5%) as the disappointment over the weekend’s events in Washington permeate through overnight markets. Market volumes are fairly subdued overall with public holidays in Hong Kong and a public holiday tomorrow in Singapore. Indeed, with Columbus Day holidays in the US we’re likely going to see fairly subdued volumes during the US time zone today as well. Many US fixed income markets will be closed today but the NYSE and NASDAQ will remain open.

Staying in the Asia-Pac region, it’s been a fairly volatile start to the week for Chinese growth-linked assets. The AUDUSD (-0.02%) opened the week around 0.3% lower after China’s export numbers for the month of September (released on Saturday) missed expectations. Looking at China’s September trade numbers in more detail, exports fell 0.3% YoY in September, against expectations for a 5.5% gain and following 7.2% growth last month. Imports managed to beat expectations though, printing at 7.4% vs consensus estimates of 7.0%. While the weekend press were quick to suggest that the export print was indicative of tepid global demand, the view from DB’s China economist Jun Ma is that the headline number was distorted due to seasonality. September this year had one fewer working day for customs than September in 2012. After seasonal adjustment, the customs department stated that yoy export growth should be 5.3%, and the annualized seasonally adjusted mom export growth reached 8.3% yoy in September. This means that the underlying export growth trend remains consistent with market expectations, according to Jun. After seasonal adjustments, import growth becomes 8.3% yoy and 11% mom (annualized) compared to a headline reading of 7.4% yoy (7.0% expected). So as ever the Chinese data offers something for everyone.

Staying in China we've seen higher than expected CPI numbers which showed September consumer inflation at 3.1% YoY (vs expectations of 2.8%) and producer price inflation at -1.3% YoY (higher than expectations of -1.4%). Copper (-0.1%) and Brent (-0.1%) are little softer this morning though. Chinese A-shares are holding onto small gains (+0.3%).

Across the rest of today and the week ahead, markets will remain at the behest of developments in Washington as we get closer to the “soft” deadline of October 17th. As we noted last week, DB’s economists believe that it’s conceivable the Treasury could get to the end of the month before requiring a debt ceiling increase, however it wouldn’t be able to operate past October 31st because the Treasury needs to make a large (estimated at $24bn) Social Security payment on November 1st. However when Treasury secretary Lew spoke on Thursday he kept on message that October 17th is the key date. In terms of data, due to the ongoing shutdown, US CPI and Housing starts/permits will not be released as originally scheduled. The data releases which will be going ahead are the Empire Fed survey on Tuesday, the NAHB housing market index on Wednesday, and Industrial production & the Philly Fed on Thursday. Elsewhere, many of the bulge bracket banks including Morgan Stanley, GS, Citi and BofA report earnings this week as well as a number of bellwether tech giants including Intel, IBM and Google.

In Europe, the two day Eurogroup/ECOFIN finance ministers’ meeting is scheduled to commence on Monday. There have been a number of reports over the weekend suggesting that today’s Eurogroup meeting will discuss measures to boost capital levels of Eurozone banks ahead of the ECB’s asset quality review which is due to be completed by next year. (Reuters). The same article argues that regulators will be heavily scrutinising the provisioning levels of restructured loans in Spain and Italy. Italy’s 2014 budget is expected to be tabled in the parliament on the 15th October. On the data front, the key releases include Eurozone industrial production (today), ZEW survey (Tues), UK inflation (tomorrow), UK unemployment (Wed) and UK retail sales (Thurs).

In Asia, it will be a busy week of data in China. Q3’s GDP (cons: +7.8% yoy) print is out on Friday together with the usual monthly data download including industrial production (cons: +10.2% yoy) and retail sales (cons:+13.4%). In Japan, August industrial production (Tues) is the key data release.