October FOMC Week Starts With Traditional Overnight Meltup

Just as it is easy being a weatherman in San Diego ("the weather will be... nice. Back to you"), so the same inductive analysis can be applied to another week of stocks in Bernanke's centrally planned market: "stocks will be... up." Sure enough, as we enter October's last week where the key events will be the conclusion of the S&P earnings season and the October FOMC announcement (not much prop bets on a surprise tapering announcement this time), overnight futures have experienced the latest off the gates, JPY momentum ignition driven melt up.

There was not much in terms of newsflow: in China SHIBOR rates continued to creep up, albeit more slowly, with the O/N and 1 Week rates barely changed, however the 2 Week Shibor got the bulk of the upward brunt rising 53.4 bps as concerns about when the PBOC will proceed with another reverse repo liquidity injection mount. The lack of enthusiasm was evident in the SHCOMP which was up 0.04% following last week's drubbing even if the Baltic Dry, which has now entered a bear market, indicates more liquidity driven pain may be in stock. Elsewhere in Japan, on the one year anniversary of Abenomics, where the only "improvements" are the plunging Yen and purchasing power, soaring energy and food input costs, and of course, a rising Nikkei225 offset by stagnant and declining wages,  the Nikkei rose on the follow through of Friday's US meltup and was up 2.19% nearly offsetting all of Friday's 2.75% losses.

Not much news out of Europe either, where the only notable development was Italian business confidence which rose to 97.3 on expectations of a 96.0 print, a two year high. At the same time the 1Y1Y Eonia jumped to as much as 39.14 bps from 37.5 bps as the ECB's excess liquidity continued to drop and touched its lower level since December 2011. At this point - and with the EURUSD at an export-busting 2 years high as well - it will soon be incumbent on Draghi to start jawboning for more liquidity and a lower Euro as happened early in the  year.

On the US docket, we have the NAR's pre-adjustment pending home sales data, as well as September's delayed Industrial production. On the micro side, about a quarter of the S&P 500’s market cap are due to report this week including a number of heavy weights such as Exxon Mobil, Berkshire Hathaway, Chevron, General Motors and ConocoPhillips, with Apple set to print after the close today.

Market Recap from Bloomberg and RanSquawk

  • Trade volumes fell sharply this morning as adverse weather conditions in the UK disrupted travel systems and caused flight delays from major airports.
  • China communist party's third plenum next month will deepen "all aspects of social and economic reform" according to reports in local press.
  • Going forward, market participants will await the release of the latest Industrial Production report, Pending Home Sales data from the US and also earnings from Apple.
  • Treasuries steady before week’s auctions begin with $32b 2Y notes today, FOMC two-day policy meeting begins tomorrow; 10Y yields have held near 2.50% level after last week’s weak payrolls data pushed Fed taper expectations to at least March 2014.
  • 2Y notes to be sold today yield 0.325% in WI trading; drew 0.348% in September. June’s stopout of 0.43%, which came amid expectations for  imminent taper announcement, was highest since May 2011
  • The Bank of Japan will continue to buy bonds until it achieves its 2% inflation target as the country’s monetary and fiscal policies are at a critical point for ending deflation, Deputy Governor Iwata said yesterday
  • Japan’s Abe warned he wouldn’t permit China to use force to resolve territorial spats, as the renewed presence of Chinese aircraft near disputed islands led its neighbor to dispatch fighter jets
  • China’s yuan traded within 0.1% of its 20-year high on speculation the PBOC is allowing the currency to strengthen to curb inflation
  • Britain risks repeating the debt-fueled binge that led to the credit crisis as the government relies on a hair-of-the- dog remedy for the economy, said former Financial Services Authority Chairman Adair Turner
  • The troubled roll-out of the Obama administration’s health- care overhaul faced mounting problems when a key computer service failed yesterday, two days after the government said its insurance exchange website would take another month to function smoothly
  • Sovereign yields mostly higher, EU peripheral spreads tighten. Nikkei +2.2%, leading Asian equities higher; European stocks mostly higher, U.S. equity-index futures rise. WTI crude, gold and copper gain

Market recap:

Stocks traded broadly higher in Europe, with defensive names outperforming, in what was generally a very light trading session so far given the adverse weather conditions in the UK which disrupted travel systems and caused flight delays from major airports. Absence of any positive catalysts resulted in stocks gradually closing the opening gap higher, while Bunds also traded little changed, as month-end related flows begin to pick up pace. Going forward, coupon and redemption related flows from Italy and Spain are expected to prove supportive of the price action this week. Overall, there was little in terms of fresh macroeconomic news flow and going forward, market participants will await the release of the latest Industrial Production report, Pending Home Sales data from the US and also earnings from Apple. Also, the US Treasury will sell USD 32bln in 2y notes

Asian Headlines

China communist party's third plenum next month will deepen "all aspects of social and economic reform" according to reports in local press.

China statistics official Pan Jiancheng expects 7.5% growth and said that economic growth in Q4 and H1 2014 are unlikely to be higher than 7.8% as it was in Q3.

Elsewhere, Chinese Industrial Profits YTD (Sep) Y/Y 13.5% (Prev. 12.8%).

EU & UK Headlines

ECB's Noyer says Europe's plans for a financial tax must be revised. Noyer says Europe’s planned financial transaction tax poses “an enormous risk” to the countries involved and could threaten financial stability.

Italy's political centre-right could split according to lawmakers, after Silvio Berlusconi resurrected his old Forza Italia party and suspended the People of Freedom.

David Smith writes the UK could notch growth of as much as 3% next year as the economic recovery picks up in the country. Allan Monks of JP Morgan said the bank’s forecast suggested the economy was expanding at 3.4% at an annualised rate which would see Q4 GDP print at 0.9%.

Barclays month-end extension: Euro Agg +0.08y
Barclays month-end extension: Sterling Agg +0.02y

US Headlines

Moody’s Analytics expects US revenue growth to be weaker in 2013 than in any of the last three holiday seasons.
Barclays month-end extension: Treasury +0.06y


Defensive names outperformed this morning, with health care as the best performing sector, which in turn resulted in the pharma heavy SMI index outperforming its peers. As a guide, 76% of the 244 S&P 500 companies that have reported so far have exceeded analyst estimates. Last week the technology sector led the way, with strong reports from both Microsoft and Amazon seeing the NASDAQ outperform its peers. All eyes are now set to be on Apple’s earnings today.


Absence of any major tier 1 economic releases this morning, together with light trade volumes given the adverse travel conditions in the UK which disrupted travel systems and caused flight delays from major airports, led to very range bound price action across major FX pairs. Of note, French Finance Minister Moscovici said we are not out of the range where we can say the EUR is overvalued.


According to the CFTC, spec accounts cut its net longs in gold by 5,716 lots to 72,938. At the same time, accounts raised net longs in silver by 410 contracts to 12,607. Furthermore, specs lowered platinum net longs by 3,056 to 26,046 contracts and bullish bets for palladium longs rose by 840 to 22,882 lots. Spec accounts raised bullish bets in copper futures and options by 2,549 lots to a net long of 7,832.

Turkey and Kazakhstan raised their gold holdings in September, while Russian reserves eased, according to the IMF.

According to Barclays, China's 4Q exports are to rise as a result of higher quotas, with quotas being nearly three times the level they were in Q3.

According to the U.A.E Energy Minister Mazrouei the nation are to spend 70bln on increasing oil, natural gas and petrochemical production capacity.
Syria have met the deadline imposed by the OPCW for the formal initial declaration of its chemical weapons program.

Deutsche Bank's Jim Reid concludes the overnight round up:

We're set for a deluge of another kind this week as data blows in from all corners as we enter the last few days of the month and play catch-up from the US shutdown. Payrolls won't come out on the first of the month though (which it usually would this Friday) and has been delayed a week. Outside of the data, we also have a Fed meeting that should be relatively uneventful but there's always scope for the nuance of the statement to change. Indeed, the statement will be all there is this month in the absence of a post-meeting press conference from Bernanke.

Asian equities have started the week on the front foot. The strong close to US trading on Friday, where the S&P500 forged another record high, is helping sentiment this morning. The Nikkei (+1.8%) is erasing most of it’s losses from last Friday when it closed down 2.75%. We’re also seeing firmer sentiment across the Hang Seng (+0.5%) and KOSPI (+0.4%). Elsewhere Chinese interbank rates continue to climb, rising to 5.03% today or an increase of 40bp, but still remain well below the spike seen in June. Chinese A-shares are underperforming again this morning (-0.6%). On a longer time scale, Chinese A-shares are one of the only major Asian equity markets, together with India, which are still trading in negative territory on a YTD basis.
Continuing with China, as we mentioned on Friday, there has been increasing chatter of wide-spread financial and economic reforms being explored in advance of next month’s 3rd plenary meeting of the Chinese government, and this was repeated by both government officials and domestic media over the weekend. In the FX market, both USDJPY and AUDUSD are higher to start the week, the former helped by BoJ deputy governor Iwata who reiterated the central bank’s commitment to achieve its inflation targets. As we go to print, US 10yr yields are a touch higher (+1bp) at 2.52% reflecting the stronger risk sentiment to start the week.

This week’s unusually heavy US data docket starts with September industrial production and pending home sales later today. This will be followed tomorrow by September retail sales, PPI and the conference board’s consumer confidence index for October. While we won’t be getting payrolls this week, the ADP employment report on Wednesday will provide an important indicator of hiring activity. The September CPI report and FOMC’s  post-meeting policy statement are also scheduled for Wednesday. Delving deep into the latter half of the week, initial jobless claims and the Chicago PMI for October will be the  main focus on Thursday. The latter may show the extent of slowdown in manufacturing activity as a result of the government shutdown, as may the ISM manufacturing report for October which is due on Friday. Fed officials will exit blackout the day after the FOMC meeting when Bullard, Kocherlakota and Lacker are due to speak at various forums. On the micro side, about a quarter of the S&P 500’s market cap are due to report this week including a number of heavy weights such as Apple, Exxon Mobil, Berkshire Hathaway, Chevron, General Motors and ConocoPhillips. More than US$90bn of 2s/5s/7s treasury supply is scheduled across the week.

Something to also look out for this week is the re-opening of congressional budget talks in the US via the convening of the bipartisan House-Senate budget committee on Wednesday. The committee is due to report back to Congress by December 13th on a budget resolution. Democrats are seeking  to boost spending higher than the $967 billion sequestration level that goes into effect early in 2014. Senate Majority Leader Harry Reid and other top Democratic leaders refuse to trade sequestration cuts, for cuts to other spending programs, such as Medicare or Medicaid — unless Republicans agree to raise revenue.

In Europe, we have a lighter data schedule this week. French consumer confidence and retail sales are due out tomorrow, followed up by Spanish Q3 GDP (where a gain is expected by the market in Q3 after 9 consecutive falls) and German unemployment on Wednesday. Eurozone unemployment and inflation data are due on Thursday. In Germany, Merkel’s CDU bloc will continue talks with the Social Democrats with the aim of forming a coalition government. The bond market will also see new supply in the form of Italian 10yr linkers (today) and new 5/10yrs (Wednesday) throughout the week. About one-fifth of the Stoxx600 will report earnings this week including a number of the large financial institutions such as UBS, Barclays and RBS. We may hear more about the potential for a split of RBS between a good bank and a bad bank which have been widely discussed by the financial media during recent weeks. Staying in the UK, a speech from the BoE’s Mark Carney is scheduled for Thursday.

In Asia, China’s official manufacturing PMI reading is the major data release (Fri) together with the final HSBC manufacturing PMI the same day. Consensus is expecting the official PMI to increase by 0.1pt to 51.2. In Japan, the BoJ’s monetary policy meeting is scheduled for Thursday. Data releases include employment, retail sales (Tues) and industrial production (Wed). So a fairly busy week.


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