Political mayhem in Europe
In terms of the news flow, there seems to be something negative in every region of the world that generally affects developed markets. In Europe, all five ministers Silvio Berlusconi requested to resign did so, and a confidence vote is now scheduled for Wednesday. Where would Italian politics be without some sort of drama? However, a new coalition is probably the market’s base case, and while we may see a further spike in Italian yields, we can’t get outrageously bearish on Italian debt given the OMT (Outright Monetary Transaction) is still technically providing support, although the Germans could derail that when they vote in October on whether the programme is even constitutional.
The politics continues in Greece, with key Golden Dawn party member being arrested, amid the start of the latest Troika review. In Austria the anti-EUR parties continue to gain traction, with Team Stronach gaining parliamentary representation (gaining 5.8% of the votes). AUD/JPY and EUR/JPY have naturally seen heavy flows, with EUR/JPY trading to a low of 131.38 in inter-bank trade. EUR/GBP has also fallen to a low of 0.8339, with GBP reclaiming its place as a quasi-safe-haven. If the world is seeing stress, we’d look to stay with what’s working and bid up sterling. Cable also looks good for a move to 1.6300, while GBP/AUD is looking like it wants to make new highs.
US budget concerns
The US budget negotiations and fiscal cliff look no better, and are the main point of concern from clients today. US ten-year bonds have opened and are trading three basis point lower, with traders continuing to look to ‘safety’ (Australian ten-year down eight basis points). The democrats will reject the Republican weekend proposal today, however the Senate will subsequently need to vote through a counter-proposal and re-submit to House speaker John Boehner who will have to pull out something big to avoid a shutdown. What is clear though is both Harry Reid and John Boehner want to avoid a shutdown, so that may work in the market’s favour, however the market is placing much more emphasis on the debt ceiling debate and rightly so as the implications could be much more severe.
One asset class we are watching above all others is the short-term debt markets in the US, specifically the US T-Bill maturing October 24. If we think back to the drama in 2011, the yield on the US T-Bill maturing August 11 went from two basis points to twenty-six basis points in the space of a couple of weeks. With the CBO saying the US could effectively miss payments on October 22, this is probably the best asset to watch to gauge the level of concern around a technical default.
It’s also worth looking at the level of demand at this week’s three and six month US bill auctions, with the bid-to-cover likely to fall.
Asian news has contributed to the moves lower and ’it’s not as though traders needed a reason to sell Japanese equities given USD/JPY is trading below the 98 handle. But throw in some average Japanese industrial production and retail sales numbers and you can see why the market is down 1.8%. Tomorrow is going to be a big day for Japan, with the much-anticipated sales tax likely to be announced, with the TANKAN also in focus. China’s HSBC PMI also missed by one full point at 50.2, although the bulls will say the small manufacturing businesses are still seeing modest expansion and the Chinese equity market hasn’t been too put off, rallying 0.6% (China CSI).
The ASX 200 is down 1.2% and although that’s a decent pullback on a percentage basis, it has to be said that the selling has been orderly, the volumes low and therefore the falls seem like a result of a buyers strike rather than genuine panic. The uptrend drawn from the June lows has been broken at 5254, but momentum is still favouring buying dips. The index is closing out the best quarter since Q3 2009, although you’d be even happier to have been long the ASX 200 in IDR (Indonesian rupiah) as you’d be up a tidy profit of 26.2%.
Ahead of the European open
European market should see good selling on the open today, and while US and FTSE futures are lower, our clients were heavy sellers of our out-of-hours markets on the open this morning. The Italian MIB looks set to open 300 odd points lower, and could take further queues from the bond market later.
ECB member Benoit Coeure is due to give a speech in Milan in early European trade, although traders will probably be looking more closely at any narrative from US politicians. There are no Fed officials due to speak today, although the board is out in force this week, with Ben Bernanke speaking on Wednesday (Thursday morning in Australia). Confusion reigns supreme here as well, with Fed opinions all over the place; this was significantly highlighted on Friday when Chicago Fed president Charles Evans said tapering could occur in 2014, although there was a ‘decent chance’ it could start in October or even December. I think you’ll find that’s called ‘covering all bases’.