Overnight Sentiment: Rumors Regurgitated, Refuted

The overnight session has been dead, leading to continued trading on the two regurgitated rumors appearing overnight, one coming from the FT that the EU is in "fresh" talks over a Spanish rescue plan - something which is not news, but is merely the occasional catalyst to get algos snapping up EURUSD and to keep it from sliding far below the 1.3000 barrier. This rumor has subsequently been swatted down later when Italy's undersecretary of finance, Gianfranco Polillo, in an interview in Rome, repeated what has been known to most for over two months, namely that Italy and Spain won’t request bailouts unless there a new surge in bond yields (just as we explained first thing in August), and adding that "There won’t be any nation that voluntarily, with a preemptive move, even if rationally justified, would go to an international body and say -- ‘I give up my national sovereignty." A surprising moment of lucidity and truth for a European. Naturally the reemergence of the rumor is supposed to draw attention away from the real news, which is that broke Catalonia is ever closer to bluffing its independence in exchange for a bailout, or else. The other real news is that as Confidencial reported, the Spanish government has asked Santander, Banco Bilbao Vizcaya Argentaria and CaixaBank to take 30% stake in the Spanish bad bank, something which will hardly make shareholders in these companies happy for the simple reason that no bank in Spain is "not bad" if the current rate of deposit outflows continues. Finally, a second rumor appearing late yesterday is that Greek lenders are considering a new Greek bond haircut. This too has since been refuted when German Finance Ministry spokesman Martin Kotthaus told reporters in Berlin at a regular press conference that this report is without basis. In other words, as we said, rumors refuted, leaving us with essentially no real news overnight.

For the remaining (lack of) action we go to DB's Jim Reid for the best market action summary.

Moving to the US and taking a closer look at the Philly Fed print, while the headline was ahead of estimates it remained in negative territory for the fifth consecutive month. As DB’s Joe LaVorgna notes, the biggest negative in the report was the deterioration in shipments (-21.2 vs. -11.3), which fell to the lowest level since the recession (-30.5 in April 2009). On a more positive note, overall expectations of economic conditions six months forward rose sharply (+41.2 vs. +12.5). The flash Markit PMI was unchanged at 51.5, while the Conference Board Leading Indicators fell in 0.1% for August. Initial jobless claims  or the September employment survey week declined -3k to 382k but remain near the top of this year’s range (352k to 392k). Joe’s preliminary read on September employment number is +110k with no change to the unemployment rate at 8.1%.

Data aside, it was a relatively dovish day in terms of Fedspeak. Fed’s Kocherlakota advocated an unemployment targeting approach to monetary policy, saying that he would like to see rates at zero until unemployment reached 5.5%, although on the condition that the Fed fulfils its price stability mandate. Also speaking yesterday, Fed’s Lockhart reiterated his support for further QE while the more hawkish St Louis Fed’s Bullard said that he does not favour unemployment targeting, and opposed QE3 saying that he would not want to see a re-inflation of US housing prices.

Over in Europe, PMIs surprised to the downside, increasing the debate around ECB policy rates. The Eurozone’s flash composite PMI was down 0.4 in September (45.9) and disappointed versus expectations of 46.6. Most surprising was the divergence between France and Germany. The latter’s manufacturing PMI improved month-on-month (47.3 vs 44.7) but France was down sharply (42.6 vs 46.0). As Mark Wall noted this reasserts Germany’s relative PMI strength after a brief period of weakness. The implied reading of the ‘non-core’ bloc was softer on the month too, but we have to wait until the  start of October to see the details for the likes of Italy and Spain.

In other European headlines, der Spiegel is reporting that EU leaders are considering drafting a declaration designed to fulfil the conditions set out by last week’s German constitutional court ruling. The declaration will clarify that each country’s maximum ESM liabilities cannot be exceeded without that country’s parliamentary approval, and provides assurance that governments will have access to information held by the ESM. Elsewhere the Italian economy minister reiterated there were no plans for Italy to request aid, although the government lowered their 2012 GDP growth forecast to -2.4% compared to a previous forecast of -1.2%. For the record, DB is expecting growth in Italy of -2.3% this year. Staying in Europe Chinese Premier Wen during his trip to Brussels said that the country will continue its investments in the EFSF and the Eurozone.

In terms of the day ahead, it will be relatively light in terms of data. Spain’s trade data and the UK’s budget data for August will be the main focus. German finance minister Schauble is due to speak this morning in Berlin. In the US, the Fed’s Lockhart will be speaking in Atlanta. Last but by no means least, the iPhone 5 goes on sale today. How long will we be able to hold out!!??