Key Drivers Of Overnight Action: Rumors Of RRR Easing Out Of China

A relatively subdued overnight session which has seen the futures spike only modestly from their lows, on yet another forced squeeze in the EURUSD which hit a high of 1.3960 after hitting a low of 1.3877 around 3am Eastern, has seen a rumor of a Chinese Reserve Ratio cut as one of the main drivers of action, which has also pushed gold to over $1660 and silver to $32. If validated, and if China is indeed welcoming inflation with open arms, counterintuitively following the completely irrelevant PMI beat, look for these two to resume their antigravitational glidepath. As for other key developments watched by the market, here is a succinct overview from Bloomberg.

  • Banks pushing back against European leaders on the size of haircuts they are ready to accept on Greek bonds. IIF proposed 40%; Juncker yesterday said PSI talks are focusing on 50%-60%
  • German budget lawmakers to convene in Berlin to study two EFSF leveraging models discussed in EFSF draft document; underscores gaps remaining in EU efforts before leaders meet in Brussels tomorrow
  • Commodities gain, stocks and U.S. index futures fluctuate. New Zealand leads Bloomberg’s Sovereign Debt Movers as its 10-yr yields fell; the government said a record budget deficit will vanish within four years.

What to watch for:

  • 2-yr notes to be sold today yield 0.30% in WI trading; drew 0.249% at September auction and record-low 0.22% in August
  • Brian Sack, NY Fed’s markets group chief, said the central bank’s program of reinvesting proceeds from maturing housing debt into mortgage-backed securities isn’t disrupting markets
  • Spain will struggle to meet its deficit-reduction target this year as economic growth slows, threatening further debt-crisis contagion as Europe fails to erect a fail-proof firewall
  • UBS AG posted a smaller decline in third-quarter profit than analysts expected after an accounting gain cushioned a $2.3 billion loss from unauthorized trading
  • 9:00am, S&P/CS 20 City MoM% SA, Aug., est. 0.1% from 0.05%
  • 9:00am, S&P/CS Composite-20, Y/y, Aug., est. -3.6% from -4.11%
  • 10:00am, Consumer Confidence, Oct., est. 46.5 from 45.4
  • 10:00am, House Price Index, M/m, Aug., est. 0.2% from 0.8%
  • 10:00am, Richmond Fed Manu Index, Oct., est. -1 from -6
  • 11:00am, Fed to purchase $4.25b-$5b notes/bonds in 10/31/17 to 08/15/19 range
  • 11:30am, U.S. to sell 4-week bills

Treasury Watch:

  • Treasury yields higher overnight, led by 30-yr +6bps to 2.12%; bias remains to upside for yields and curve spreads, according to Bloomberg analyst TJ Marta
  • Moderate data risk today from home price reports, Richmond Fed manufacturing index, consumer confidence; Fed buying ~$4.5b 6-8yr notes
  • 2-yr yield testing higher towards downtrending 100-DMA 0.2921%; support Oct. 14 low 0.2534%, uptrending 50-DMA 0.2242%
  • 5-yr yield testing higher towards top of 1.00-1.10% range; resistance downtrending 100-DMA 1.19%; support Oct. 20 low 1.00%, 50-DMA 0.9537%
  • 10-yr yield trending higher towards Oct. high 2.29%, next resistance Aug. 25 high 2.31%; support Oct. 18 low 2.08%, 50 DMA 2.06%, record low 1.67%
    30-yr yield compressing higher above 50-DMA and towards Oct. high; resistance Oct. high 3.29%; support 50-DMA 3.23%, Oct. 18 low 3.05%
  • 2/10 curve higher intraday lows as curve presses higher towards psychological 200bps resistance and then Oct. high 202bps; support 50-DMA 183bps, Sept. 28 high 181bps

As for the German parliament's "intervention" in the bailout process which the media world only picked up on this week apparently even though it has been all too clear for weeks now that every ECB decision has to be approved by the Bundestag (so much for independence), here is Goldman's take:

Yet another big vote in the Bundestag. The coalition decided yesterday - somewhat surprisingly, given that the coalition rejected a similar request on Thursday from the Green party - to ask the whole Bundestag to vote on a possible increase in the effective lending capacity of the EFSF through some sort of leverage. Chancellor Merkel will give a speech in the Bundestag on Wednesday, after which the Bundestag will vote (probably around lunch time). We expect the Bundestag to provide Merkel with a sufficiently broad mandate such that the chancellor will be able to negotiate the details with the other European governments at the summit in Brussels.


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