Volumeless Drift Lower Continues For Fourth Day

Early weakness in Asia driven by US-follow thru selling and ongoing concerns about the us fiscal showdowns as well as the debt ceiling, if not by actual news, resulted in a red close in both the Nikkei and SHCOMP, as well as other regional indices such as the Sensex. This then shifted to Europe, where however stocks reversed the initial move lower and are seen broadly flat, with Bunds remaining bid on the back of month-end, as well as coupon and redemption related flows. However the move higher in stocks was led by telecommunications and health care sectors, which indicates that further upside will require another positive catalyst. There was little in terms of fresh EU related macroeconomic commentary, but according to a report published by the European Banking Authority, the EU’s biggest 42 banks cut their aggregate capital shortfall with respect to the “fully loaded” 2019 Basel III requirements to €70.4bln as of December 2012. This is amusing since not one European bank has actually raised capital, but merely redefined what constitutes capital courtesy of a liberal expansion of RWA, Tier 1 and various other meaningless definition which works until such time as the perilous European balance kept together by the non-existent OMT, is tipped over.


Furthermore, Europe’s big banks are on track to meet Basel III capital requirements within six months – five years ahead of schedule – based on the evidence of a new regulatory monitoring exercise. An exercise which just like all prior European stress tests, is already the laughing stock of traders everywhere.


Two days after Germany's CDU/CSU celebrated its victory, falling short a majority by five seats, early indications are that the task of finding a suitable ally is not going to be a walk in the park. SocGen reports that the SPD is tipped to enter the fold at some point, but party officials are not hiding their intention to attempt to leverage their coveted position by asking for concessions on a wide range of issues including higher taxes, increased health spending and the introduction of a minimum wage. As a result the EUR has been downhill since the market opened on Monday with a small forecast miss for the German Ifo and lower equity markets adding marginal selling pressure.


In other news, senior EU officials refused to back budget policy change that would ease austerity according to an EU official.


Going forward, market participants will get to digest the release of the latest Durables Goods, New Home Sales, weekly DoE data and the US Treasury will sell USD 35bln in 5y notes.


Overnight News bulletin from Ransquawk and Bloomberg:



  • Treasuries steady, intermediate and long tenors leading yields lower, as week’s auctions continue with $35b 5Y notes, yield 1.455% in WI trading; drew 1.624% at August auction, highest in over two years.

  • $33b 2Y notes sold yesterday drew 0.348%, stopping through by about 0.5bp despite lack of outright concession; curve concession helped as 2/5 and 2/10 spreads were narrowest since mid-Aug.

  • Americans are losing faith in the nation’s economic recovery even as forecasters expect growth to accelerate, according to a Bloomberg National Poll; the poll also shows that the American public is more alienated from Washington that at any time since the 2011 downgrade of the nation’s credit rating

  • China’s economy slowed this quarter as growth in manufacturing and transportation weakened in contrast with official signs of an expansion pickup, a private survey showed

  • Europe’s big banks are on track to meet Basel III capital requirements within six months – five years ahead of schedule – based on the evidence of a new regulatory monitoring exercise.

  • The likely formation of a grand coalition in Germany may cost Merkel the finance ministry and Schaeuble his post as one of architects of the euro area’s austerity policy, according to BofAML economists

  • Japan must raise its sales tax to at least 20% by the time the Olympics come to Tokyo in 2020 to avert a “disaster” in its bond market, according to the head of a panel advising the world’s biggest pension fund

  • The largest global banks cut the shortfall in the reserves they’ll need to meet Basel capital rules by 82.9 billion euros ($112 billion) in the second half of 2012, leaving a gap of 115 billion euros

  • Sovereign yields, EU peripheral spreads mixed. Nikkei falls 0.8%, leading Asian markets lower. European stocks mixed, S&P 500 futures little changed. WTI crude and copper rise, gold falls


Asian Headlines


State economist Fan expects China Q3 GDP growth at 7.8%, Q4 GDP growth at 7.6% and FY GDP growth at 7.7%.


EU & UK Headlines


According to a report published by the European Banking Authority, the EU’s biggest 42 banks cut their aggregate capital shortfall with respect to the “fully loaded” 2019 Basel III requirements to EUR 70.4bln as of December 2012. Furthermore, Europe’s big banks are on track to meet Basel III capital requirements within six months – five years ahead of schedule – based on the evidence of a new regulatory monitoring exercise.


Senior EU officials refused to back budget policy change that would ease austerity according to an EU official.


Said EU officials decided proposed budget change needs more discussion. Said EU officials decision means EU budget round in November won't reflect new methodology.


German GfK Consumer Confidence (Oct) M/M 7.1 vs. Exp. 7.0 (Prev. 6.9, Rev. to 7.0)
French Business Confidence (Sep) M/M 97 vs. Exp. 99 (Prev. 98)
Italian Consumer Confidence Index (Sep) M/M 101.1 vs. Exp. 98.5 (Prev. 98.3, Rev. 98.4) - Highest since June 2011.


ECB's Hansson says ECB can keep rates low on moderate recovery.


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


US Headlines


US Treasury Secretary Lew said market calm over debt limit is greater than it should be. Lew added the Treasury may have less than USD 50bln in mid-October and that less cash is on hand than expected as the debt ceiling deadline looms.


A bipartisan majority of the US Senate has demanded Obama address 'currency manipulation' in trade negotiations with 12 Pacific nations.


Barclays month-end extension: Treasury +0.06y


Equities


Stocks in Europe reversed the initial move lower and are seen broadly flat, with Bunds remaining bid on the back of month-end, as well as coupon and redemption related flows. However the move higher in stocks was led by telecommunications and health care sectors, which indicates that further upside will require another positive catalyst.


- According to a report published by the European Banking Authority, the EU’s biggest 42 banks cut their aggregate capital shortfall with respect to the “fully loaded” 2019 Basel III requirements to EUR 70.4bln as of December 2012.


FX


USD/JPY trended lower, as USTs remained bid, which in turn encouraged unfavourable interest rate differential rate flows. Consequent USD weakness supported EUR and GBP, however EUR outperformed, which also saw EUR/GBP make a test on the 21DMA line.


Commodities


Deutsche Bank forecasts WTI crude to average USD 100/bbl in 2013 and USD 98.75/bbl in 2014; forecasts Brent to average USD 110/bbl in 2013 and USD 106.25/bbl in 2014.


Separately, analysts at the bank cut 2013 platinum forecast by 4.1% to USD 1520 and 2014 estimate cut 5.1% to USD 1613. Palladium estimate for 2013 lowered by 2.3% to USD 727 and 2014 estimate cut 6.3% to USD 750. Analysts also noted that gold was given temporary lifeline by tapering delay.


US API US Crude Oil Inventories (Sep 20) W/W -54K vs. Prev. -252K
- Cushing Crude Inventory -395K vs. Prev. -889K
- Gasoline Inventories 341K vs. Prev. -641K
- Distillate Inventory 485K vs. Prev. -167K


Gazprom opposes Rosneft and Exxon Russia LNG plans as competition in Russia's LNG markets intensifies. This was followed by comments from Rosneft that Exxon's Russian LNG project is still intact.


The White House says it tried to arrange a discussion between President Obama and Iranian President Rouhani at the UN assembly yesterday. However, Iran said a meeting was too complicated to take place.


Iranian President Rouhani said Iran will never seek nuclear weapons and is ready to engage in resultoriented nuclear talks. Rouhani also stated Iran has always had peaceful nuclear goals and that Nuclear weapons have no place in Iran's doctrine.


- Rouhani further added Iran poses no threat to the world or region, stating there is no military solution to Syrian crisis and that the goal must be a quick end to killing.


- Following Rouhani's UN address, there were comments from Israeli PM Netanyahu that Rouhani speech was 'cynical' and Iran is buying time to develop nuclear weapons capabilities, while Israel minister Steinitz accused Rouhani of playing "game of deception".


 


* * *


As usual, DB's Jim Reid rounds off the overnight summary


The S&P 500 closed at -0.26% as it sank further below the pre-FOMC levels. One of the bright spots in US equities were homebuilders which managed to record a gain of 2.26% after strong quarterly earnings reports from home construction companies Lennar (+4.2%) and KB Home (+4.3%). Interestingly, Lennar’s CEO projected that supply would still fall short of demand by a wide margin despite a significant increase in building activity and the rise in rates over the last few months. Lennar's backlog of houses ordered but not yet finished – a key forward looking indicator for the industry - rose 32%yoy to 5,958 in units and 53% to $1.9 billion in value, according to Reuters. Back on the macro side, the data flow was a little mixed. The Case-Schiller 20 city price index rose 0.6%, lower than expectations of 0.8%. There was a weaker than expected US consumer confidence report (79.7 vs 79.9 expected). However the labour market component of the survey improved as both jobs plentiful edged higher (11.5 vs. 11.3 previous) and jobs hard-to-get moved lower (32.7 vs. 33.3). The Richmond Fed (0 vs 12 expected) disappointed mirroring the previous day's decline in the flash US PMI.


US treasuries remained fairly well bid on Tuesday as yields fell for the 11th time in 13 days. The 10yr yield closed at 2.655% (or -4.5bp) which is the lowest level since August 12th. The lower treasury yields saw credit outperform (CDX IG -1.25bp) despite the weakness in US equities. Indeed government bonds on both sides of the Atlantic performed well yesterday, particularly gilts where 10yr yields firmed by 12bp following strong demand for the new 2068 index-linked which were the longest dated ever issued by the UK. It’s scary that I'll be 94 (hopefully) when they mature. The news sparked short covering demand in gilts, which were further boosted by comments from the BoE’s Tucker who reaffirmed the bank’s commitment to current forward guidance.


It’s a fairly mixed session for Asian equities this morning with gains across the ASX200 (+0.9%) and Hang Seng (+0.3%) while the Nikkei (-0.4%) trades lower. The USD index is up around 0.1% which is weighing on EM currencies such as the PHP (-0.3%), THB (-0.2%) and INR (-0.15%). The 4.5bp rally in USTs yesterday is helping Asian credit spreads grind tighter overnight, despite a raft of new issuance in recent days.


On the subject of new issuance, the recent strength in treasuries is helping the market absorb a wave of new bond supply globally, including a bond deal from General Motors yesterday. The US automaker was able to take advantage of a rating upgrade back up to investment grade territory by Moodys to price $4.5bn in bonds. The deal was underpinned by a jumbo order book in excess of $25bn. The company says the proceeds from the 5yr, 10yr and 30yr issuance will be used to buy back higher yielding preferred shares and notes in its capital structure. This was the first major debt private offering for the company since emerging from bankruptcy protection (WSJ).


Amid the continuing US budget debate, Moody’s provided some reassuring words saying that that a debt ceiling impasse and a government shutdown are unlikely to affect the US sovereign rating. Note that Moody’s is the only major rating agency that still rates the US government at the equivalent of AAA with a stable outlook. Fitch also rates the US government at AAA but has a negative outlook while S&P is at AA+ with a stable outlook.


On the data docket today are consumer confidence readings in Germany and Italy and the latest business confidence and jobseeker numbers in France. The US will print the latest durable goods orders, mortgage applications and new home sales data. Durable goods are the most interesting after big falls last month. However the first month of the quarter (last month's reading) have often been very weak in recent years only for the numbers to bounce back. We'll see if this is a repeat of this trend.


We'll now end on recapping the upcoming US fiscal issues facing us over the next few weeks. First up is the need for Congress to pass a continuing resolution before the US government shuts down on October 1st (the start of the next fiscal year). After that the US is set to hit its $16.7tr statutory debt limit around mid-October. On the government shutdown, as it stands the Republican-dominated House has passed a bill funding the government but stripping the Affordable Care Act (“Obamacare”) of funding, something unacceptable to the Democrat-dominated Senate. DB’s Frank Kelly believes that the Senate will send the bill back to the House having stripped it of the language defunding Obamacare and funding the government through to December 15th and that after some posturing the House will pass this continuing resolution on time to avoid a government shutdown.


The debt ceiling debate is a bit more complicated and the interesting thing to watch for will be what the House demands (and gets) from the Senate and White House to raise the debt limit. Again we turn to Frank for some insight here. He believes one (or both) of two things will likely be demanded by the House: (a) a provision delaying the implementation of (rather than defunding) Obamacare by one year. Politically this is popular even with those Democrats facing re-election in 2014 who’d rather see this sticky issue off the table until after the election. (b) a provision inserted into the debt ceiling increase which instructs the House and Senate to allow a simple up or down vote on comprehensive tax reform before the end of the year. The exact details of what this reform would entail are unknown but it would likely be big and might be attached to the next continuing resolution which, if all plays  out as above, would be needed by December 15th. Frank stresses this is a very complicated and fluid situation. It will certainly be one to watch and over the coming weeks.


With these issues we suspect that the market will take the view that these issues are major but will likely get pushed back like they did in Summer 2011 and last New Year. Fiscal fear fatigue has set in. Indeed given these last two events this is probably the most rational way to think about it but one of  these days we will probably see one of these low probability/high impact events go the other way. This is why we need to be watchful.

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