With Less Than A Day Until The X-Date, Hope And Optimism Remain If Not Much Else

It's gotten beyond silly: with less than a day to go until the first X-Date, beyond which if Jack Lew is correct (he isn't) all hell will break loose if the US doesn't have a debt deal in place, stocks couldn't care less, Bills continue to sell off, carry traders only care how big the central banks' balance sheets are, all news are generally shunned and yet stocks have soared 600 DJIA points on Harry Reid's relentless optimism a deal will get done, even though so far none has. Today, as we observed on Monday, we expect more of the same: stocks and futures will ignore the reality that the midnight hour will come and go with no deal in place, but will continue to explode higher as Harry Reid's latest set of "optimism" headlines hits the tape in low volume trading. We expect the first big hope rally around POMO time, then shortly after Senate comes back in Session, around noon. Then for good measure, another one just before market close. Why not: it's not like the "market" even pretend to be one anymore. Keep an eye on today's 4-Week bill auction before noon. It should be a far bigger doozy than yesterday's longer-dated bills.

US Government Shutdown Update from Bloomberg and RanSquawk:

Fitch placed US 'AAA' sovereign on rating watch negative. Fitch said the US was placed on rating watch negative as US authorities have not raised Federal debt ceiling in a timely manner. Fitch also cut its US GDP growth 2013 forecast to 1.6% from 1.9% and cut its 2014 GDP growth forecast to 2.6% from 2.8%. Fitch added that the rating watch negative status will be resolved by end of Q1 2014. There were also comments from the US Treasury that Fitch's decision reflects urgency with which congress should act to remove the threat of default.

The House Rules Committee postponed its hearing as support for Speaker John Boehner’s new plan appeared to be in serious doubt. Following the House postponing the vote, US Senate leaders resumed negotiations on a deal to avert default and fund the government, where a senate source commented that US Senate leaders could announce a deal within hours.

GOP Representative Dent said House Speaker Boehner is to allow a 'clean' Senate bill vote and that the House is likely to take up and approve a senate bill.

The US senate are due to reconvene at 1100CDT/1700BST and US President Obama is to meet with Treasury Secretary Lew at 1325CDT/1925BST on Wednesday.

Market Re-Cap

European Equities are seen broadly negative, with consumer goods and tech sectors underperforming, following a number of disappointing premarket earnings reports and a lack of progress in the US to resolve the deadlock in Washington. The CAC 40 is the worst performing index in the European morning as large cap stocks Danone and LVMH trade lower by around 3% and 6% respectively after both co.’s missed expectations in their earnings reports.

Late yesterday Fitch placed the US 'AAA' sovereign on rating watch negative, pointing to the fact that US authorities have not raised Federal debt ceiling in a timely manner. As a result, credit spreads widened this morning and the Eurodollar curve steepened, albeit marginally.

In FX GBP/USD traded higher by 40 pips and broke above the 1.60 handle approaching its 21DMA to the upside as USD weakened throughout the morning and the UK’s better than expected jobs report drove participants to further doubt the BoE’s forward guidance of low rates into 2016. Meanwhile, having risen to its highest level since late Sep, GBP SONIA 12X24 forward rate fell sharply following the release of the aforementioned jobs report, which revealed that even though UK jobless claims fell the most in 16 years, the unemployment rate held steady at 7.7%.

Looking ahead, markets will pay close attention to the US Senate who are due to reconvene at 1100CDT/1700BST as we enter the penultimate day of the debt ceiling deadline, additionally US President Obama is to meet with Treasury Secretary Lew at 1325CDT/1925BST on Wednesday. Also Fed's Beige Book will be released later on in the session, also, given the recent rise in yields on soon to be maturing T-Bills, today's sale of USD 68bln by the US Treasury in T-Bills across various short-dated maturities will likely be closely watched.

Asian Headlines

China's NDRC says it feels optimistic about keep CPI this year under 3%.

The PBOC said China credit rose relatively fast in Sept with the country having ample liquidity and reiterated their prudent monetary policy.

EU & UK Headlines

UK ILO Unemployment Rate 3-Months (Aug) 7.7% vs. Exp. 7.7% (Prev. 7.7%)
Avg Weekly Earnings 3M/Y (Aug) 0.7% vs. Exp. 1.0% (Prev. 1.1%, Rev. to 1.2%)
Weekly Earnings ex. Bonus 3M/Y (Aug) 0.8% vs. Exp. 1.0% (Prev. 1.0%)

UK Jobless Claims Change (Sep) M/M -41.7K vs. Exp. -25.0K (Prev. -32.6K, Rev. -41.6K)
Claimant Count Rate (Sep) M/M 4.0% vs. Exp. 4.2% (Prev. 4.2%)

EU Trade Balance (Aug) SA M/M 12.3bln vs. Exp. 11.8bln (Prev. 11.1bln, Rev. 11.0bln)

ECB's Praet said we are in relatively normal range in EUR FX rate and discussion on liquidity measures are open.

German Chancellor Merkel's parties see no common ground to form a coalition with Greens and decide not to pursue any further talks on forming a coalition government between the parties.

US Headlines

CME to add 12% to base margins for OTC interest rate swap portfolios due to uncertainty around US debt ceiling impasse. (FT-More)


Equities are seen broadly lower as sentiment is weighed upon by US debt ceiling concerns and poor earnings. Specifically Danone shares trade lower by 3% after reporting Q3 overall LFL sales growth up 4.2% vs. Exp. up 4.8% and co. lowers 2013 forecasts. Similarly LVMH shares see losses of 6% after reporting Q3 Revenue EUR 7.02bln vs. Exp. EUR 7.24bln, Q3 Organic sales growth 8% vs. Exp. 10% although the co. remains upbeat for the rest of the year. These two co.s have caused underperformance for the CAC 40.

Conversely the FTSE MIB stands alone in positive territory as Monti Paschi provides a lift after source reports that the co. is to meet with the Italian government to discuss a sale of their stake.

Apple is cutting iPhone 5C orders by less than 20% in Q4 but increasing orders for the iPhone 5S according to sources. Aftermarket earnings from the US included Intel, Yahoo and CSX, which all beat expectations in their Q3 EPS reports.

Overnight news bulletin from Bloomberg and RanSquawk

  • Fitch placed US 'AAA' sovereign on rating watch negative as US authorities have not raised Federal debt ceiling in a timely manner.

  • UK ILO Unemployment Rate 3-Months (Aug) 7.7% vs. Exp. 7.7% (Prev. 7.7%) and Jobless Claims Change (Sep) M/M -41.7K vs. Exp. -25.0K (Prev. -32.6K, Rev. -41.6K)

  • Markets anticipate the earnings from large cap companies IBM, Bank of America, PepsiCo, eBay, American Express, BlackRock, Bank of New York Mellon today.

  • U.S. equity futures advance and JPY weakens against all its peers after Senate leaders said they’ll resume talks on the debt limit as the deadline looms; GBP gains vs most major peers after U.K. job claims dropped most in 16 yrs.

    U.K. unemployment rate remained at 7.7 percent while jobless claims dropped the most since 1997 amid signs the labor market is improving

  • Senate leaders press toward fiscal deal with House in disarray

  • Investors holding $120b of Treasury bills coming due tomorrow are increasingly worried that they won’t get  paid

  • New Zealand’s dollar touched a 1-month high after data showed inflation accelerated to the fastest pace in two years, fanning speculation RBNZ will raise borrowing costs.

  • China’s stocks fell the most in 3-wks after JP Morgan advised reducing holdings; companies linked to Shanghai’s free-trade zone tumbled on concern valuations are excessive

We conclude as always with the overnight recap by Deutsche's Jim Reid

Following a tipsy turvy session overnight the S&P 500 fell 0.71% to close near the day’s lows on news that a House Republican driven fiscal proposal had failed to receive enough internal support. The spotlight is now  firmly back to the Senate with Senator Reid and Senator McConnell quick to resume negotiations to hopefully craft a bipartisan deal before the looming deadline. As reported by the New York Times, under the emerging Senate deal, the government would be funded through 15th January and the debt limit extended until the 7th February. Both the House and Senate would also need to agree on a detailed tax-and-spending blueprint for the next decade by 13th December. A proposal to delay the imposition of a tax on medical devices has been dropped from the deal, as has a complicated tax on self-insured unions and businesses participating in the health care exchanges. All that remained for Republicans was the language around tightening income verification for those seeking subsidies on the insurance exchanges but that language was still being negotiated.

A spokesman for Reid said that the majority leader was “optimistic that an agreement is within reach” with McConnell but that there are still risks of delays. Assuming that a Reid-McConnell agreement is struck, a parliamentary maneuver could be used to allow the majority leader to quickly move the deal to the Senate floor today. However this would require unanimous consent to ensure a final vote on the same day. In the absence of unanimous consent, things may just drag on for a bit longer. Indeed several articles have highlighted the risks of further delays if Senator Ted Cruz or other conservative hardliners chose to object. Cruz has repeatedly said that “I will do everything necessary and anything possible to defund Obamacare.” So reaching a broad agreement aside there are still a few hoops to go through before it can be considered a done deal. All eyes clearly will be on this today as we await for further developments from Capitol Hill.

On the other hand, Fitch was certainly in less of a “wait and see” mode yesterday. The US sovereign’s AAA rating was placed on Rating Watch Negative in a post market announcement. The agency continues to believe that the debt ceiling will be raised soon but highlighted that the political brinkmanship and reduced financing flexibility could increase the risk of a US default. This is somewhat at odds with Moody’s which again reiterated that it expects that the US government will pay interest and principal on its debt even if the debt ceiling isn’t raised.

Default concerns are also being reflected in the short term funding costs of the US government. The yield on the $120bn in T-bills maturing this Thursday has risen by about 17bp over the last two days to close at 0.363% yesterday. 1- month T-bill yields were also up by 19bps from the intraday lows yesterday to close at around 0.349% - highest in 5 years. Yesterday’s bills auctions also didn’t go well as 3-month T-bills were priced at the highest discount rate since 2011. The Treasury will sell a total of US$68bn in T-bills across various shortdated maturities today so something for markets to watch out for besides events in Washington.

On that note, we came across an interesting comment from Citi’s CFO who said that the bank no longer held USTs maturing before 1 November and had minimal exposure to US debt maturing before 16 November. Citigroup yesterday reported lower-than-expected quarterly earnings as fixed income and US mortgage revenue weakness dominated. After market also saw Intel reported better-than-expected numbers for Q3 although worldwide PC shipments is said to have declined by 8.6% during the quarter. Asian equity markets are on the weak side this morning but S&P 500 Futures are actually trading half a percentage point higher overnight on hopes of a Senate driven deal today. The Hang Seng and the Shanghai Composite are around -0.4% and -1.3% lower, respectively. Asian credit spreads are generally tighter across the board with the Asia iTraxx about 4bps tighter on the day. Gold has given back some of yesterday’s gains currently at around $1279.5/oz whilst the Dollar index is firmer overnight.

Looking ahead to today, the Fed’s Beige Book, mortgage applications and the NAHB Housing Market index for October are the notable economic releases. We will also hear from the Fed’s Pianalto, Geroge and Fisher through the day. Bank of America, PepsiCo and IBM are some of the bigger names reporting today but in reality data and company results will continue to take a backseat for now. All eyes will continue to be firmly set on developments in Washington.

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