Global Markets Shrug As US Government Shutdown Enters Day 3

Global stocks and U.S. bond markets on Monday shrugged off day three of the US government shutdown in Washington, although the dollar pulled back as the euro continued its strong start to the year, while U.S. stock index futures dipped less than 0.1% on expectations that the political impasse will not hurt the U.S. economy and that it will be resolved shortly, which may prove to be an overly optimistic outlook.


Here is Bloomberg's quick on what has been a particularly quiet overnight session:

Exceptionally quiet European session due to lack of pertinent economic data or macro events, focus remains on U.S. government shutdown. USD is offered against G-10, DXY remains firmly within 90-91 range established last week. ZAR outperforms after reports that ANC leadership decided Zuma must leave office, albeit without a deadline. Core European equity markets trade flat, energy sector leads gains despite crude futures also trading unchanged, OPEC+ weekend meeting ended with recommendation to keep cuts for whole of 2018. UST curve holds overnight flattening, focus on long-end swap spreads which tighten back from blowout on Friday; Spain outperforms other EGBs after Fitch upgrade. Metals markets grind marginally higher across the board due to move in USD

U.S. Treasury yields, which fell during previous government shutdowns, rose as investors saw limited economic fallout from the standoff in the U.S. capital and instead focused on a global economy motoring ahead. The 10Y yield rose to to its highest level in more than three years on Monday, although it since faded some of the move.


Bunds were steady after weakening with Treasuries on Friday as USD swap spreads snapped wider. Spanish bonds jumped after Fitch upgraded Spain late on Friday: Spanish 10y bond yields open lower by 5bps at 1.39% after Fitch upgrades Spain to A- from BBB+; though flows have been very low so far, traders told Bloomberg. Strategists were split on the timing of the upgrade with many looking for the move later in the year. While there are no direct index implications, there was some expectation that an upgrade to A status would prompt fresh demand for Spanish bonds from more conservative funds. Most other euro zone bond yields were little changed - analysts said investors were probably moving to the sidelines before the European Central Bank’s first meeting of 2018 this Thursday.

Back to the US shutdown, where analysts appeared unimpressed: "These things have no near-term or midterm economic impact whatsoever,” said Michael Purves, chief global strategist and head of derivatives strategy for Weeden & Co in New York. "They are kind of embarrassing for the United States, but it’s not really going to alter business or consumer confidence," he said.

"We’re not worried as we have been here before. Perhaps this is more fractious and may take longer to resolve, but it shouldn’t have a massive economic impact,” said Patrick O‘Donnell, investment manager at Aberdeen Asset Management.

And yet, as we explained on Saturday , the biggest reason why the market's optimism may prove problematic, is should the shutdown stretch into late February or early March when the "X-date" for the US debt ceiling approaches, and put the US in danger of a technical default. This is how Pantehon's Ian Shepherdson put it this morning:

In the worst case scenario, the budget impasse could drag on, via a series of stopgap measures, until March, perilously close to the point where the debt ceiling has to raised or suspended, as was the case from November 2016 through March last year. We would be astonished if Congress could not cobble together a majority of the sane in order to prevent a default. But astonishment has been quite common in response to events over the past couple of years, so investors would be well-advised to rule out nothing, however outlandish

For now, however, there is hope that a deal may be cobbled as soon as non on Monday: late on Sunday US Senate Majority Leader McConnell said the intention is to resolve immigration as quick as possible and declared the next Senate procedural vote will be held Monday at 12 ET vs. initial expectations of a 0100EST vote, while US Senate Minority Leader Schumer said they have yet to reach an agreement on a path forward. In related news, US Republican Senator Flake noted that a bipartisan meeting is to be held 1000EST to discuss continuing resolution, while US Senator Cornyn had earlier stated he was now more optimistic after leaving a GOP leaders’ meeting.

All of this remains lost on US equity futures however, which as noted above are barely in the red this morning, while major markets around the globe are mixed, with some happy to peek in the green. Wall Street, which had been resilient to the threat of a shutdown, rose on Friday, with the S&P 500 and Nasdaq notching record closing highs despite the imminent shutdown. Investors shrugged off the threat last week, saying they were not worried about a major pullback in shares if U.S. lawmakers failed to strike a deal. Eventually, stocks may have no choice but to sell if a compromise deal is to be "pushed" upon Congress.

Around the world, trader apathy was tangible. European shares traded with little clear direction as markets focused on a flurry of mergers and acquisitions and progress towards an end to political deadlock in Germany. Europe's STOXX 600 index was largely flat while Germany's DAX was down 0.1%, France's CAC-40 was down 0.2% and the UK's FTSE was unchanged. The MSCI world equity index was also flat. U.S. stock futures were down marginally after Wall Street set record highs on Friday.

In Asia, Australia's ASX 200 (-0.2%) and Nikkei 225 (flat) were subdued as the US shutdown sapped investor sentiment, although downside was limited amid some hopes on resolving the impasse. Chinese markets were choppy in which the Shanghai Comp (Unch.) was flat and Hang Seng (-0.1%) initially stalled after it recently hit record levels, but was later underpinned amid outperformance in Shenzhen stocks.  China’s ChiNext Index of small-cap and tech shares climbed as investors went bargain-hunting following gauge’s drop to a five-month low last week.

Finally, 10yr JGBs were flat despite a cautious tone in stocks, as participants were sidelined amid an enhanced liquidity auction for longer dated JGBs and as the BoJ kick-starts its 2-day policy meeting.

Of note, the People’s Bank of China injected cash into financial system via open-market operations for the eighth straight session, the longest run since November 2016. Onshore market. PBOC pumps in net 20b yuan through reverse-repurchase operations, taking total injections since Jan. 11 to 820b yuan. The onshore yuan little changed at 6.4030 per dollar as of 6:08pm in Shanghai, while the PBOC strengthens daily reference rate by 0.09% to 6.4112.

In macro, the Bloomberg Dollar Spot Index remained in defensive mode amid a government shutdown and a rebound in Treasuries. The euro held modest gains and bunds steadied as Germany took a step toward a coalition government. The pound found leveraged demand after the London open while EMFX and equities traded mixed. The EURUSD gained 0.2 percent and was trading at $1.2253, although volatility in the euro-dollar exchange rate was more muted than would have been expected, given flare-ups during previous U.S. government shutdowns.

“The market is accustomed with what is taking place in U.S. politics. It is not reading too far into the shutdown, which is more like a political show,” said Koji Fukaya, president of FPG Securities in Tokyo.

As reported yesterday, on Sunday Germany’s SPD voted in favor (362 for, 279 against) of formal coalition discussions with German Chancellor Merkel’s conservatives. There were also comments from SPD leader Schulz who said that coalition talks are going to be just as hard as the exploratory talks and that he hopes negotiations will start soon.   As a reminder, the Euro Area will today begin their search for Vitor Constancio’s successor as ECB Vice President; Spain’s economy minister de Guindos has been touted as a likely successor.

Elsewhere, reports stated that US President Trump's anger towards UK PM May puts a post-Brexit trade deal between the 2 nations at risk, and that the relationship is said to have soured. Meanwhile, cable got a boost after French President Macron said UK could get a special trade deal with EU post-Brexit, but will not have full access to the single market without accepting its rules, while he added the UK cannot cherry-pick the elements it liked.

Oil prices climbed higher after comments from Saudi Arabia that cooperation between oil producers who are withholding supplies would continue beyond 2018. Brent crude futures were at $68.67 a barrel at 0930 GMT, not far from the $70.37 level hit on Jan. 15. That was oil’s highest level since December 2014.

Bulletin Headline Summary from RanSquawk

  • USD softens in reaction to US government shutdown, while EUR finds support from German politics.
  • Equity failing to find any firm direction, with major indices somewhat mixed.
  • Today’s calendar sees a lack of tier 1 highlights.

Market Snapshot

  • S&P 500 futures down 0.09% to 2,808.50
  • STOXX Europe 600 unchanged at 400.87
  • MSCI Asia Pacific up 0.2% to 183.98
  • MSCI Asia Pacific ex Japan up 0.3% to 600.48
  • Nikkei up 0.03% to 23,816.33
  • Topix up 0.1% to 1,891.92
  • Hang Seng Index up 0.4% to 32,393.41
  • Shanghai Composite up 0.4% to 3,501.36
  • Sensex up 0.8% to 35,799.18
  • Australia S&P/ASX 200 down 0.2% to 5,991.91
  • Kospi down 0.7% to 2,502.11
  • Brent Futures up 0.2% to $68.71/bbl
  • Gold spot up 0.1% to $1,332.70
  • U.S. Dollar Index down 0.1% to 90.47
  • German 10Y yield rose 0.6 bps to 0.574%
  • Euro up 0.2% to $1.2251
  • Italian 10Y yield fell 2.7 bps to 1.694%
  • Spanish 10Y yield fell 2.2 bps to 1.421%

Top Overnight News

  • Lawmakers failed to negotiate an end to the government shutdown Sunday despite a bipartisan effort to broker a deal, raising the political stakes as federal agencies begin closing at the start of their normal workweek
  • German Chancellor Angela Merkel moved forward in her bid to form a fourth-term government after her prospective coalition partner agreed to shelve its misgivings and enter negotiations on a common policy platform for Germany
  • OPEC and Russia reaffirmed that they’ll persevere with oil-production cuts until the end of the year to clear a global glut and signaled their readiness to cooperate beyond that
  • Greece is nearing a key milestone in its financial-crisis history, as it moves a step closer toward the exit from its rescue program; its creditors are set to start discussing better repayment terms for its bailout loans as euro-area finance ministers meet in Brussels today

Asia markets traded with a cautious tone as the region reacted to the US government shutdown, which heads into a 3rd day after the Senate failed to pass the spending bill through procedural vote on Friday, but are currently working on a shorter 3-week continuing resolution. ASX 200 (-0.2%) and Nikkei 225 (flat) were subdued as the US shutdown sapped investor sentiment, although downside was limited amid some hopes on resolving the impasse. Chinese markets were choppy in which the Shanghai Comp (Unch.) was flat and Hang Seng (-0.1%) initially stalled after it recently hit record levels, but was later underpinned amid outperformance in Shenzhen stocks. Finally, 10yr JGBs were flat despite a cautious tone in stocks, as participants were sidelined amid an enhanced liquidity auction for longer dated JGBs and as the BoJ kick-starts its 2-day policy meeting. PBoC injected CNY 60bln via 7-day, CNY 40bln via 14-day and CNY 10bln via 63-day reverse repos. PBoC set CNY mid-point at 6.4112 (Prev. 6.4169)

Top Asian News

  • Hedge Fund Startups in Asia See Signs of Revival After Slow 2017
  • Fresh Doubts Raised on China’s Bad-Loan Data as Fraud Uncovered
  • Templeton’s $38b Bond Fund Builds U.S. Stake in Tilt From EM
  • India’s Nifty 50 Futures Roll Is Cheap Days Before Expiration
  • Cedar Who? When Obscure Chinese Buyers Pounce on Famous Targets

European equities have kicked the week off with little in the way of firm direction (Eurostoxx 50 -0.1%) with traders awaiting today’s procedural vote in the Senate at 1700GMT as the government shutdown continues. In terms of sector specifics, energy names outperform given the moves seen in oil markets, telecoms are also seen higher following positive comments from the Deutsche Telekom CEO (+1.6%). Elsewhere, other notable movers include, UBS (-2.5%) who trade lower in the wake of their earnings with markets overlooking their buyback and restructuring efforts. Further to this, Ocado (+12.7%) tops the Stoxx 600 after striking an international deal with Sobeys of Canada, William Hill (-12.9%) lags the Stoxx 600 after stake reductions on UK gambling machines. Finally, YOOX Net-a-Porter (+25%) are seen markedly higher after reports that Richemont are to offer EUR 38/shr for the Co.

Top European News

  • Battle to Save United Europe Looms and Line Is Drawn at The Alps
  • Italy’s Election Promises Heap Strain on Debt-Loaded Nation
  • Greece Set to Enter Next Bailout Phase as Day-After Talks Near
  • OPEC, Russia Signal Global Oil Alliance May Endure Past 2018
  • Dixons Carphone Names Alex Baldock CEO to Replace James

In FX markets, GBP is firmer across the board as French President Macron suggests that the UK may be able to secure a ‘special’ Brexit deal, albeit with conditions in terms of retaining access to the single EU market. Cable is eyeing the 1.3900 level again and EUR/GBP is drifting back towards 0.8800 despite some Eur positive news via Germany’s SPD voting in favour of starting talks to form a grand coalition with Merkel’s CDU-CSU alliance. The latter has underpinned EUR/USD firmly above the 1.2200 level that has formed solid support bar a brief knee-jerk below (1.2165 last week’s low) on pull-backs from 1.2325 peaks, and ahead of a key Fib retracement at 1.2143. Thursday’s ECB policy meeting will likely be the next main (independent) driver, although for the Dollar all eyes are on tonight’s Senate vote on White House funding (12.00EST/17.00GMT). In the run up, the DXY is holding near 90.500 within a 90.700-155 range, with the Greenback softer vs all G10 peers to varying degrees. USD/CHF is back down around 0.9600, while AUD/USD and NZD/USD have both rebounded to test big figure pivots at 0.8000 and 0.7300 respectively. USD/JPY relatively flat between broad 110.50-111.00 parameters ahead of the culmination of January’s BoJ policy meeting (Tuesday) with decent buy orders seen at the range base and offers at the top. USD/CAD hovering near the bottom of its 1.2465-1.2515 range as NAFTA talks continue. Note, no large option expiry strikes running off today close to current market levels. The ANC in South Africa has moved to eject President Zuma as Ramaphosa steps up his fraud purge.

In the commodities complex, WTI crude futures saw marginal overnight gains after the OPEC/Non-OPEC JMMC meeting on Sunday in which producers reaffirmed they will proceed with oil cuts as planned and signalled willingness for cooperation beyond 2018. Elsewhere, gold has been choppy amid similar price action in the greenback and copper attempted to nurse some of last week’s losses, although the recovery was capped by a cautious risk tone and resistance at the USD 3.20/lb level. OPEC and Russia reaffirmed they will continue with oil-production cuts until year-end and indicated a willingness for cooperation beyond the date as Saudi Energy Minister Al-Falih commented that there is consensus among producers to continue their cooperation beyond this year, while UAE’s Oil Minister Mazrouei said UAE wants a proposal for cooperation after 2018.

What to look out for today: a fairly quiet start to the week on Monday with Brexit likely to be the focal point as action on UK PM Theresa May’s Brexit legislation passes to the House of Lords. Also in Europe, finance ministers in the Euro area are due to meet to discuss Greece’s bailout. It’s possible that ministers will also list candidates to replace Constancio’s ECB seat. Datawise, the December Chicago Fed activity index is due. Notable companies reporting earnings include Netflix and UBS.

US Event Calendar

  • 8:30am: U.S. Chicago Fed Nat Activity Index, Dec., est. 0.22, prior 0.15

DB's Jim Reid concludes the overnight wrap

Mrs. Merkel is now a step closer towards forming a fresh coalition with the SPD. On Sunday, 56.4% of SPD delegates voted in favour (362 vs. 279) of pursuing formal talks with Mrs Merkel’s bloc to potentially form the next grand coalition government. Looking ahead, talks could begin as soon as today and if all goes well, it could be complete by early February. The leader of the CSU Party Horst Seehofer noted a new government could be sworn in by the first half of March. This morning, the Euro pared back earlier gains to be up c0.1%.

Over in the US, the government is in the third day of a partial shutdown and the situation is still evolving. The Senate has been in session over the weekend and a group of centrist Senators have proposed a short term fix which extends government funding till 8th February with assurance that there will be a separate vote on legislations to protect the undocumented immigrants brought to the US as children. Looking ahead, Senator McConnell noted that the Senate will vote again today on the proposed plan. Earlier, President Trump tweeted the potential of a “nuclear option” to resolve the stalemate, which involves changing the rules to pass the proposed bill via the Senate with a slim majority (ie: 51 votes) rather than the required 60 votes. As a reminder, there have been 18 government shutdown over the past 42 years and they have lasted between 1 to 21 days. The median S&P returns was 0% during these shutdowns, with the highest at +3.1% in 2013 and lowest at -4.4% in 1979. So historically it hasn’t tended to interfere with markets too much. This morning, the UST10y yield is down 1.5bp and off Friday's 3.75 year high while the US dollar index is marginally up.

We’ll recap Friday fully below but it’s worth noting that we’ve now passed the longest period without a 5% pull back in the S&P 500 since we have daily data back to 1928. The 395 days without one pips the 394 days in the late 1990s and the 384 days back in the mid-1960s. So we’re living through a uniquely strong consistent period for performance.

Moving now to this week’s highlights before we recap Friday. It should be a fairly busy week. Kicking off with central banks, both the BoJ (Tuesday) and ECB (Thursday) should be of some interest for markets. While DB expects no
change in policy at either meeting (along with consensus), our Japan economists acknowledge that there is some growing belief in markets that the BoJ could fine tune its yield curve control by raising the 10y JGB yield target. Our colleagues however believe that allowing such speculation to run unheeded could compromise the YCC’s sustainability, and any upturn in the yen from the BoJ’s policy normalization expectations could weaken the momentum towards wage hikes just ahead of the Shunto spring wage negotiations. With regards to the ECB, the big focus will be on any potential change to forward guidance. Our European economists expect Draghi to prepare the ground for changes to forward guidance in his press conference by differentiating policy expectations from the policy reaction function within forward guidance. They also expect the recent Euro appreciation to be a talking point.

Let’s not forget Davos and all those outdoor power chats and big coats on Bloomberg and CNBC TV. The Forum will take place from Tuesday to Friday with President Trump due to deliver a keynote address on the final day, while a  further 339 political leaders are due to attend. Staying with politics, Brexit should jump back to the forefront with UK PM Theresa May’s Brexit legislation due to pass to the House of Lords today where it will be scrutinised.

With regards to economic data this week, the big releases are the January flash European PMIs on Wednesday where the consensus is for a slight decline in both the manufacturing (60.3 from 60.6) and services (56.4 from 56.6) readings, albeit still at lofty levels. The first estimate of Q4 GDP in the US on Friday (+2.9% qoq annualized) is the other headliner. It should also be a fairly busy week for earnings with 80 S&P 500 companies due to report including Netflix (Monday), Johnson & Johnson (Tuesday), Verizon (Tuesday), Ford Motor (Wednesday) and Caterpillar (Thursday). The full day by day week ahead is at the end.

This morning in Asia, markets are broadly lower. The Nikkei (-0.11%) is edging lower, while the Kospi is down -0.88%, weighed down by tech stocks after the Maeli Business newspaper reported that Apple have asked Korean partners to reduce parts supplies. Elsewhere, Hang Seng and China’s CSI300 is up 0.25% and 0.83% respectively.

Now recapping market performances from Friday. The S&P rebounded (+0.44%) to fresh record highs with most sectors up and financials benefiting from a Bloomberg report that noted the Fed may loosen the leverage ratio rules on banks. The Dow (+0.21%) and Nasdaq (+0.55%) also increased modestly. European markets were all higher, with the Stoxx 600 up 0.54%, supported by consumer discretionary and health care stocks. Across the region, the DAX  led the gains (+1.15%) to be near its all-time high while the CAC (+0.58%) and FTSE (+0.39%) also advanced. The VIX fell for the first time in six days to 11.27 (-7.8%).

Over in government bonds, UST 10y yields rose 3.4bp to 2.660% and to the highest since April 2014, while UST 2y rose 2.1bp to the highest since 2008. Elsewhere, core European bonds were little changed with Bunds and French OATs 10y yields down c0.5bp while Gilts rose 0.8bp. Peripherals outperformed with yields down 3-5bp.

Turning to currencies, the US dollar index strengthened 0.08% while the Euro and Sterling softened -0.13% and -0.26% respectively. In commodities, WTI oil fell 0.91% while OPEC and Russia have reaffirmed they will continue with OPEC production cuts until at least the end of the year. Both Gold and Silver gained c0.4% while other base metals were mixed (Copper -0.60%; Aluminium -0.44%; Zinc +0.58%).

Away from markets and onto Greece, S&P has upgraded the country’s long term foreign currency debt for the first time in two years, by lifting its rating one notch higher to B with a positive outlook. S&P noted that “Greece’s growth  and fiscal outlooks have improved alongside a labour market recovery and a period of relative policy certainty” and the positive outlook reflects “further upside rating potential from the policy and financing environment over the next year”.

Turning to some of the Brexit headlines over the weekend. French President Macron seems to have softened his position on potentially including UK based financial services firms in a post Brexit trade deal, he noted “…it depends on what you’re ready to put on the table in terms of preconditions” and that “… (the UK) can have some deeper relations…(with us). For instance, we have a deeper relation with Norway than…Canada”. Elsewhere, the Sunday Times noted the former leader of the UK independence party Nigel Farage may set up a new pro-Brexit party and “head back to the front line” if Brexit was not being delivered. Finally, the Express noted 100 UK Conservatives in Parliament will pressure PM May to withhold further payments to the EU until a new free trade deal is signed and demand that Britain leaves Europe’s single market and end the free movement of people from March 2019. So a lot of conflicting headlines around on Brexit.

Before we take a look at this week’s full calendar, we wrap up with other data releases from Friday. In the US, the January University of Michigan consumer sentiment index was lower than expected at 94.4 (vs. 97). Across Europe, Germany’s December PPI was in line at 0.2% mom and 2.3% yoy, while the Euro area’s November trade surplus widened more than expected at €32.5bln (vs. €30.8bln). Elsewhere, the UK’s December retail sales (ex-auto fuel) was below market expectations at 1.3% yoy (vs.2.6%).

What to look out for today: a fairly quiet start to the week on Monday with Brexit likely to be the focal point as action on UK PM Theresa May’s Brexit legislation passes to the House of Lords. Also in Europe, finance ministers in the Euro area are due to meet to discuss Greece’s bailout. It’s possible that ministers will also list candidates to replace Constancio’s ECB seat. Datawise, the December Chicago Fed activity index is due. Notable companies reporting earnings include Netflix and UBS.