Buy The Tragicomedy, Sell The Soap Opera Season Finale
If there is anything the market has shown in the past 16 days of government shutdown, which is set to reopen this morning in grandiose fashion following last night's 10 pm'th hour vote in the House, is that it no longer needs Washington not only to function but to ramp higher. All it needs is the Fed, which in turn needs an unlimited debt issuance capacity by the US Treasury which it can monetize indefinitely, which is why the debt ceiling was always the far more pressing issue. In other words, the good news is that the can has been kicked, and now the government workers (who will need about a week to get up to speed), can resume releasing various government data showing just how much 5 years of now-open ended QE have impaired the US economy, and why as a result, even more years of unlimited QE are in stock (because in a Keynesian world, what caused the problem is obviously what will fix it). The bad news: the whole charade will be repeated in three months.
More importantly, with futures no longer having the hopium bogey on the horizon, namely the always last minute debt deal, they have finally sold off on the back of a weaker USD. It is unclear if the reason for this has more to do with climbing the wall of shorters which is now gone at least until February when the soap opera returns, or what for now, has been an absolutely abysmal Q3 earnings season. Luckily, in a centrally-planned world, plunging stocks is bullish for stocks, as it means even more Fed intervention, and so on ad inf.
And since a repeat of the whole soap opera in January is highly likely and the government will be shuttered once more, the only thing that will really be impaired - not government workers, they love the paid vacation with retroactive salaries - will be concurrent government data, so "very critical" for the Fed to decide on future policy, which simply means if the BLS' random number generators stop humming in early 2014, all that will happen is for the Taper, which is now expected to take place between March and June 2014, to be delayed once more in what is now the playbook: shut down government 2-3 months before taper is due, kick can, rinse, repeat.
Overnight news bulletin from Bloomberg and RanSquawk:
- The US Congress passed a bill to avert government default and reopen Federal agencies. Attention will turn to the potential release of an updated schedule for key US data.
- UK Retail Sales Ex Auto (Sep) M/M 0.7% vs. Exp. 0.3% (Prev. -1.0%, Rev. -0.8%). Furniture sales provided the biggest boost for the increase in sales in September from August, likely linked to a recovery in the housing market.
- IBM trade lower by 6% premarket following their less than impressive earnings report after market yesterday, Google, Philip Morris, Verizon Communications and Goldman Sachs are scheduled to report today.
- China’s Dagong downgrades U.S. credit ratings to A- from A
- USD falls more than 0.5% vs 7 of 10 peers; GBP extends gains after stronger-than-expected U.K. retail sales.
U.S. debt impasse ends, see more here; Chinese rating company downgrades U.S. credit rating
- Obama signs legislation to end shutdown and extending the nation’s borrowing authority until early next year
- End of fiscal impasse shifts focus to a new series of deadlines, the first for budget negotiations with a Dec. 13 target
- Today: Initial jobless claims expected to drop to 335K vs prior 374K; Fed members speak on economy, policy
- U.K. Sept. retail sales rise 0.7%, beats median est. of 0.3% gain
2014 to be the year of the boom; macro will be lifted by lower fiscal and banking drag, BofAML’s chief investment strategist says
- Swedish Sept. unemployment rate unchanged at 7.5% (prior 7.3%)
- Euro-area Aug. current account surplus rises to EU17.4b
- Euro-area Aug. unadjusted current account surplus EU12.0b
- Survey by Markit Economics finds U.K. households have brought forward expectations for higher rates
- Talks on Iran’s nuclear program pick up pace, U.S. and European diplomats say
US Government Shutdown Update:
The US Congress passed a bill to avert government default and reopen Federal agencies. The Senate initially voted 81-18 to pass the bill which would fund the government until January 15 and raise the debt ceiling through Feb. 7.
The bill was then passed by the House with 285-144 votes in favor, and was later signed by President Obama. There were also comments from the Office of Management and Budget that federal government employees should expect to return to work this morning.
European equities traded with broad losses in the European morning as the US government only managed a temporary fix for the debt ceiling and government shutdown, causing a pull back from record highs seen yesterday.
The US Senate and House voted to pass a bill which would fund the government until January 15 and raise the debt ceiling through Feb. 7. before being signed into law by President Obama. This however means there is only 3 months until congress meets similar difficulty, raising the potential that the US’ sovereign rating could be threatened in the long-run, a point made even more realistic by the downgrade from A to A- by Chinese rating agency Dagong this morning.
The Greenback trades significantly lower (-0.8%) in the European morning as markets reassess their prediction of when the Fed with cut back on QE 3. Amid the debt ceiling debacle markets began to push back their prediction of a Fed decision to taper MBS and Treasury purchases to December of this year, this however now appears unlikely, as it will again come only weeks before another potentially costly period of gridlock in the US government.
With rates contracting after the agreement in Washington, continued gains are seen in benchmark fixed income products. Bunds and Gilts track T-notes higher with each posting significant upside in European morning trade, despite large issuance in today’s session from France, Spain and the UK. Thus far the Spanish and French issuance has been successfully absorbed. Looking ahead markets will be focused upon weekly jobs data from the US as well as any news on an updated schedule for the data delayed during the shutdown, as government employees return to work this morning.
PBOC said China faces pressures for faster credit growth on Fed's decision to hold off from reducing stimulus. The PBOC added it will closely monitor changes in the mortgage market and pro actively support the purchase of first homes.
An appropriate decline in trade and other macroeconomic figures will help China's manufacturing industry as high prices of raw materials hurt downstream companies according to a researcher at the Ministry of Commerce.
EU & UK Headlines
UK Retail Sales Ex Auto (Sep) M/M 0.7% vs. Exp. 0.3% (Prev. -1.0%, Rev. -0.8%) Furniture sales provided the
biggest boost for the increase in sales in September from August, likely linked to a recovery in the housing market.
UK Retail Sales Ex Auto (Sep) Y/Y 2.8% vs. Exp. 2.2% (Prev. 2.3%)
UK Retail Sales Incl. Auto (Sep) M/M 0.6% vs. Exp. 0.4% (Prev. -0.9%, Rev. to -0.8%)
UK Retail Sales Incl. Auto (Sep) Y/Y 2.2% vs. Exp. 2.0% (Prev. 2.1%)
UK DMO sells GBP 4.75bln in 1.25% 2018 Gilts, b/c 1.64 (Prev. 1.59) and yield tail of 0.4bps (Prev. 0.2bps)
Moody's said Italy's banking system outlook remains negative.
S&P cut annualized US growth view to closer to 2% from 3% and said the shutdown shaved at least 0.6% off yearly Q4 GDP growth.
Chinese rating agency Dagong downgraded US sovereign credit rating to A- from A, sparking vague market talk that major rating agency Fitch were to do similar also.
PIMCO's El-Erian said the Fed may have no choice but to keep easing longer.
The SMI outperforms its counterparts by more than a per cent and is the single European bourse to trade positively as two of its largest contributors, Nestle and Roche, see gains after strong earnings reports. As for other individual stocks stories, KPN trades lower by near 10% after America to be considering selling their current stake. Movil withdrew their bid for the company and in a complete U-turn, are said be considering selling their current stake.
IBM reported Q4 Adj. EPS USD 3.99 vs. Exp. USD 3.96; reaffirms view. Q3 rev. USD 23.72bln vs. Exp. USD 24.74bln.
Non-GAAP gross profit margin 49.1% vs. Exp. 49.4%.
American Express reported Q3 EPS USD 1.25 vs. Exp. USD 1.22. Q3 Revenue USD 8.3bln vs. Exp. USD 8.21bln.
With markets participants pushing back forecasts of QE tapering from December, the USD-index trades lower by 0.8% with EUR/USD back above 1.36, GBP/USD topping the 1.60 handle and USD/JPY trading lower by as much as 90 pips. Commodity linked currencies, in particular AUD, continues to benefit from the surge in gold and silver prices. Technically, the outlook for AUD/USD is bullish, as the 50DMA line is set to cross the 100DMA line to the upside.
Iraq have said that China are to increase their purchasing of Iraqi crude by 70% to 850,000bpd. Profits for the production of European gasoline have fallen to the lowest levels for almost two years due to EUropean demand falling amid an increase in US supply.
US API US Crude Oil Inventories (Oct 11) W/W 509K vs. Prev. 2760k
- Cushing Crude Inventory (Oct 11) W/W 291K vs. Prev. -156K
- Gasoline Inventories (Oct 11) W/W -2200K vs. Prev. -2800K
- Distillate Inventory (Oct 11) W/W -1300K vs. Prev. -1070K
Spot gold also benefits from bets against the USD and trades higher 2.32%.
Gold gained the most in over two weeks in the bullion market on Wednesday on increased buying by stockists and retail customers for the ongoing festival and marriage season, amid volatile trade in global markets. Gold prices surged by Rs 650 to Rs 31,200 per 10 gram on heavy purchases by stockists and retailers for the marriage season and approaching ‘Diwali’ festival.
Demand for US gold coins surged in October, reversing recent weak sales, with American Eagle gold coin sales reaching 10,000oz on Tuesday.
Copper output in China is set to remain at record levels for the rest of 2013 as high treatment fees encourage smelters in the biggest producer to run at full capacity.
China average daily crude steel output at 2.128mln tonnes in early October, which is down 1.11% from late September according to CISA.
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Some more details on the government shutdown, and the overnight news from DB's Jim Ried
16 days of political wrangling later and we finally have a deal in Washington but will we be back here again early next year? The good news for markets is that it seems highly unlikely that the Fed will risk tapering in December or January assuming the next budget negotiations go close to the wire again. The deal allows the government to be funded through the 15th of January and the debt ceiling to be raised until the 7th of February although the Treasury would have tools to temporarily extend its borrowing capacity beyond that date if Congress failed to act early next year. So as we discussed last week, it could be March at the earliest for tapering which would continue to keep assets on the expensive side for the coming few months at least.
The Senate originated deal cleared the House of Representative with a 285-144 vote just hours before today's 'deadline'. The plan contains no provisions relating to the Obamacare medical device tax but includes a provision around income verification of those seeking Obamacare subsidies. The deal would also set up a conference committee to negotiate broader budget issues by mid December. The good news is a near term federal government debt default is averted and the drag on business/consumer confidence/activity could have been longer. That said it also appears to set us up for another episode of political drama in Washington not too far down the road but as we said at the top this surely keeps the Fed accommodative for longer. Hopes of an 11th hour deal had been on the rise ever since headlines suggested that Senate leaders have resumed negotiations and made good progress towards a bipartisan deal. Indeed the S&P 500 gained 1.38% on the day to close just 4pts away from its all time closing highs of 1725.5 even before the Senate vote. Credit markets also performed strongly with US IG 4bps tighter and HY over half a point higher in price terms. The front end of the US rates curve also rallied as fears of a debt default receded. Yields on 1-month bills fell 21bp to close at 0.137%. Interestingly longer end of the Treasury curve also rallied despite the risk rally elsewhere. The 10yr UST yield fell 6bps to 2.663% but part of that perhaps reflecting some of the data softness yesterday. Indeed the NAHB homebuilder sentiment came below expectations as the series fell 2pts in October. The latest Fed’s Beige Book indicated that economic activity expanded at a “modest to moderate” pace but interesting also stated that many contacts noted increased uncertainty due to the government shutdown and debt ceiling debate.
Data watchers clearly will be looking out for any signs of debt shutdown related impact on underlying activities in the coming weeks but as the earnings season continues to unfold a few companies are already feeling the effects of it. Stanley Black & Decker yesterday blamed the shutdown for its profit warning as the company said there was usually a surge in government spending in September that just didn’t occur this year. WW Grainger reported a high single digit decline in sales to the government and warned that sequestration and the shutdown remain significant headwinds. In reality the shutdown effects, if any, will probably come through in Q4 numbers but analysts will also likely be pressing management for some clarity around October's business performance on the earnings calls.
Staying on this theme, the Q3 earnings season has been decent although we have seen more EPS beats than revenue beats as usual. Indeed of the 44 US companies that have reported so far, 70% of them have come ahead of EPS consensus although only 52% exceeded analysts’ sales expectations. The trend was largely the same for the 22 companies that reported yesterday, which ended up with a beat:miss ratio of 82%:18% for EPS but only 59%:41% for sales revenue. As a quick recap of yesterday, Bank of America, American Express and KeyCorp are some of the ones that managed to beat both top and bottom line estimates whilst IBM and eBay managed to only outperform EPS expectations.
Turning to the Asian session overnight, major bourses are mostly in positive territory across the region as markets welcome the breakthrough in Washington. The Hang Seng, Nikkei and the Shanghai Composite indices are +0.2%, +0.9% and +0.5% respectively as we go to print. That said S&P 500 Futures (-0.06%) are trading a tad softer so there is perhaps a little bit of ‘selling the fact’ going on. Asian credit spreads are also rallying tighter with longer duration and higher beta sectors being the main outperformers. Treasuries continue to trade firmly overnight with the 10yr yield another 3bps lower at 2.61%. Gold is steady at $1281/oz while the Dollar index is a touch softer.
With a near term fiscal solution in hand, data flow and corporate earnings may slowly regain more focus from here even if there will be distortions. On the data front, the weekly jobless claims and the Philly Fed survey are the key US releases although we will also get the retail sales numbers from the UK. We have 24 S&P 500 companies reporting today with Goldman Sachs, Verizon Communications and Google amongst the big names to watch.