Ongoing Deterioration In Core Europe Pushes Dollar Higher, Risk Lower

Everything was proceeding according to central-plan with a gradual rise in risk and a decline in the USD until 4 am Eastern, when the German IFO Business Climate data was released and missed across the board (107.7 vs Exp. 108.0; Current assessment 111.4 vs Exp. 112.5; Expectations 104.2 Exp.104.0), reminding everyone now that Merkel is cemented for the near future, the immediate prerogative for Europe is to get the EUR lower, one way or another. A returning bid to the dollar also has pushed 10 Year yields under 2.70%, while once again sending various EM currencies sliding, and bringing back cross asset volatility to a world whose Sharpe ratio over the past several months has plummeted into negative territory. Increasing concerns about a government shutdown (misplaced) will likely prevent a solid bid from developing under markets.

Stocks and bonds traded higher in Europe this morning, with the Italian FTSE-MIB outperforming after Telefonica agreed to boost its stake in Telecom Italia for about EUR 441mln. The release of less than impressive macroeconomic data from Germany, month-end related flows, together with coupon and redemption flows from Belgium and Italy supported the bid tone by Bunds, with the EONIA 1y1y forward swap rate also under pressure (Sep lows and mid-August lows) amid somewhat cautious comments from ECB’s Nowotny. Of note, there is around EUR 29bln of cash flows from Belgium and EUR 4.8bln of coupon payments and EUR 24.1bln of redemptions from Italy will be eligible for reinvestment this week. Going forward, market participants will get to digest the release of the latest Consumer Confidence report, API data after the closing bell on Wall Street and the US Treasury will sell USD 33bln in 2y notes.

Overnight news bulletin from Bloomberg and RanSquawk :

  • Treasuries higher, with yields 5Y and longer lower by 1-2bps, as week’s auctions begin with $33b 2Y notes; yield 0.36% in WI from 0.386% in August.

  • German business confidence rose to 107.7 in September, less than forecast, from 107.6 in August

  • The Fed’s surprise decision to delay tapering stimulus as inflation remains subdued suggests Bank of Japan Governor Kuroda faces an uphill battle to stoke price increases with QE

  • ECB’s Ewald Nowotny said no new liquidity at the moment; the central bank will discuss if a new LTRO is needed

  • The release of less than impressive macroeconomic data from Germany, month-end related flows, together with coupon and redemption flows from Belgium and Italy supported the bid tone by Bunds.

  • China’s central bank will sell bills in the coming quarter for the first time since June to contain inflation as cash pours in from abroad, HSBC Holdings Plc and Guotai Junan Securities Co. forecast

  • Sovereign yields lower. EU peripheral spreads mostly wider. Nikkei little changed, most Asian markets fall. European stocks higher, S&P 500 futures lower. WTI crude, gold and copper fall

Asian Headlines

China's PBOC conducted its largest one-day fund injection in seven months, injecting USD 14.4bln into the money markets through six-day reverse bond repurchase agreements.

EU & UK Headlines

German IFO Business Climate (Sep) M/M 107.7 vs. Exp. 108.0 (Prev. 107.5)
German IFO Current Assessment (Sep) M/M 111.4 vs. Exp. 112.5 (Prev. 112.0)
German IFO Expectations (Sep) M/M 104.2 vs. Exp. 104.0 (Prev. 103.3)

ECB's Nowotny says not yet in situation to think about exit from measures, adding that unconventional policy remains important as long as we stay in troubled waters.

German CSU Party General Secretary Alexander Dobrindt doesn't see talks with The Green Party as worthwhile. (Die Welt)

Barclays prelim month-end extension: Euro Aggr +0.11y
Barclays prelim month-end extension: Sterling Aggr +0.24y

US Headlines

Senate Democrats are said to consider a shortened stopgap budget bill. According to the report, the Housepassed spending measure would expire on Dec. 15 and changing the bill expiration to Nov. 15th is a possibility.

As a reminder, late yesterday Fed's Lockhart (Non-FOMC) said no taper in September was a 'close call' and the Fed did not mislead about September FOMC. While Fed's Fisher (Non-Voter, Hawk) said he argued against Fed decision last week to keep QE unchanged. Said no QE taper adds to uncertainty about Fed policy and undermines Fed credibility.

Barclays prelim month-end extension: Treasury +0.06y


Stocks and bonds traded higher in Europe this morning, with the Italian FTSE-MIB outperforming after
Telefonica agreed to boost its stake in Telecom Italia for about EUR 441mln. On the other hand, basic materials related stocks under performed, with spot gold and silver prices under pressure after analysts at Citigroup noted that
Chinese demand is expected to be pressured by credit tightening.


Even though spot USD/JPY remained bid and traded in close proximity to a touted 99.00 option expiry, 1m implieds traded heavy, testing the post FOMC low at 10.4550 in the process, which is also the lowest level since mid-January.

EUR/USD was pressured by weaker data from Germany and also hawkish comments from Fed's Lockhart made late yesterday who said no taper in September was a 'close call', while Fed's Fisher said he argued against Fed decision last week to keep QE unchanged.


Iran's foreign minister will meet six major world powers at the UN this week to discuss Tehran's nuclear programme, US and EU officials say.

The UN's under secretary general for political affairs has said there is a fresh opportunity for a political, diplomatic approach to the Syria crisis, now that Damascus has acknowledge it has chemical weapons and agreed to join the Chemical Weapons Convention.

Russian deputy foreign minister says talks with US on Syria going "not so smoothly", Moscow concerned threat of US military action only delayed.

Analysts at Citigroup believe that Chinese demand is expected to be pressured by credit tightening that began in Q2 and intensified over the summer. There is typically a six-month lag for monetary policy changes to affect demand and analysts expect the impact to be felt in Q4. Recent industrial and FAI data are also less reassuring than headline numbers suggest.

Iraq are to add 400,000bpd of oil output by the end of 2013, with the Gharraf and Majnoon oil fields to pump 100,000bpd and 190,000bpd in a month respectively according to the Iraqi Deputy Premier for Energy Shahristani.

Nigeria declares force majeure as it shuts the Trans Niger pipeline.


* * *

DB's Jim Reid recaps the balance of the overnight action:

Looking at overnight markets, the cautious risk tone has flowed through to Asian equities this morning and there is increasing market chatter about the US budget debate. Markets are being led lower by the Hang Seng (-1.1%), Nikkei (-0.4%) and KOSPI (-0.7%). In the EM space, Indian sovereign and quasi-sovereign names are trading about 5-10bp wider after the State Bank of India was downgraded to Baa3 by Moodys. Its ratings are now on par with that of the Government of India. Other EM credit names are trading several basis points wider and 10yr UST yields are 1bp firmer.

Central bankers took much of the spotlight yesterday and we ended up getting mixed messages from a number of Fed speakers, in contrast with a dovish Draghi. The highlight from the Fed speakers was from the NY Fed’s Dudley (a voting FOMC member) who defended the FOMC’s September decision by saying that policy needs to remain very accommodative to push against economic headwinds including the looming US budget uncertainties. Dudley also suggested that the Fed cannot taper until it is confident that labour market improvements will continue. The Fed’s Lockhart (a non-voter) was a little more balanced saying that the September meeting was a close call, echoing sentiments from Bullard last Friday. However, Lockhart remarked that it was difficult for the data to be strong enough to justify an October taper, which is in contrast to Bullard’s comments that next month’s FOMC was indeed a “live” meeting. There were no surprises from the Dallas Fed’s Fisher (non-voter) who reiterated his hawkish stance against QE. He also said that the FOMC’s vote last week (where only one person dissented) did not reflect the discussion at the policy table. Fisher made some interesting comments on the Fed chair candidacy saying that the “the White House has mishandled this terribly” and that the Fed “must never be a political instrument”. Despite differing on policy, Fisher stated that Yellen would make a “great chairperson”.

Across the Atlantic, Draghi pledged to “use any instrument, including another LTRO if needed, to maintain short-term money market rates at a level which is warranted by our assessment of inflation in the medium-term”. The EURUSD fell to a low for the day of -0.33% (or 1.348) shortly after Draghi’s comments and core/periphery bond yields firmed 1-2bp. Draghi’s comments came after it was reported last Friday that European banks will return EUR7.9bn of LTRO loans early to the ECB this week, which is the biggest weekly repayment since May. Banking system excess liquidity is now at EUR215 billion, the lowest level since late 2011 (Reuters). A Reuters poll of euro money market traders had expected banks to return EUR2.5 billion this week.

Outside of the central bank speakers, there was little apparent progress on the US budget debate as the days tick down to Sep 30. Senate Majority Leader Harry Reid said the House bill to fund government through to mid-December (and defund Obamacare in the process) was “dead”. Bloomberg is reporting that Senate Democratic leaders are assessing the possibility of shortening the House-passed continuing resolution by a month to cover only the period from Oct. 1 through Nov. 15, while stripping out the Obamacare language of the House bill.

In terms of data flow, the euro area flash composite PMI continued to improve in September, increasing by 0.7pts on the month to 52.1, slightly stronger  than the expected 51.9. While the services sector jumped by 1.4pts to 52.1 (vs 51.1 expected), manufacturing disappointed, falling by 0.3pts to 51.1 (versus 51.8 expected). At the latest level the composite PMI is largely in line with DB’s projection for +0.2% qoq euro area GDP growth in Q3 and Q4. The US dataflow was fairly limited yesterday. The US flash manufacturing PMI was weaker-than-expected at 52.8 (vs 54.0 consensus and 53.1 in August). US  real estate listing portal, Zillow, reported that home values continued to climb in August, with prices up 0.4% from July. However, in a potential sign of deceleration in house prices, Zillow noted that August marked the third consecutive month in which monthly home values rose more slowly than the month before. On a related topic, Citigroup, which is the fifth largest US mortgage originator, announced overnight that it will cut 1000 jobs from its mortgage lending business as refinancings slow.

Turning to the day ahead, the German IFO and US consumer confidence are the major data prints. The jobs plentiful indicator of the US consumer confidence survey will be of considerable interest. An update on US house prices will be provided by the Case-Shiller and FHFA indices for the month of July. The Fed’s Pianalto and George will be speaking today at a Chicago Fed conference.

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