Will an agreement be reached before October 17?

The market certainly got quite excited late last week thinking we would see agreement between the US president and Republican house speaker John Boehner, to push the debt ceiling out to 22 November.

  • - It’s the Harry Reid/Mitch McConnell show
  • - Let the fixed income market be your guide
  • - China’s trade balance not

These talks fell through on Saturday and dialogue has been pushed through to the Senate to try and work something out. The eyes of the financial markets are firmly on the Senate for the next four days and it’s become the Harry Reid and Mitch McConnell show; the heat is on these two leaders to come to an agreement before the October 17 soft deadline.

It’s the Reid/McConnell show

There have been a number of traders questioning why US futures haven’t fallen more than 1% on the open today (currently down 0.7%), given talks between the Senate majority leader (Harry Reid) and minority leader (Mitch McConnell) are not showing any clear signs of progress, given last week’s hedge reductions. With the S&P 500 rallying from 1646 to 1703 (3.5%) and the Dow Jones putting on 517 points in the latter stages of last week on the premise of a weekend debt ceiling extension, you could make an argument that futures could have pulled back further. Again this is testament to a market that feels something will be agreed upon in the coming days.

We haven’t really even seen too much of a move in USD/CHF or USD/JPY, while gold has actually found sellers, which is really odd as the probability of passing the October 17 soft deadline has increased today. This again highlights the limited investment case for holding gold, because if it can’t rally when futures are down 0.7% and monetary policy is this loose, when will it rally? It will be interesting to see how London and US treat the precious metal today, but short positions are preferred and stops could now be brought down to $1325 (just above the August 28 downtrend).  

Let the fixed income market be your guide

The fixed income market once again will be our guide this week, while the VIX index should also be closely watched given last week’s sizeable reversal. Outside the ultra-short maturity T-bill complex, longer-dated bonds are hardly moving, with the ten-year treasury closing unchanged for the last couple of days at 2.68%. The action is firmly centred on the October and November maturities and the volatility there has been breathtaking.

On Thursday and Friday there was some rotation of duration, with traders happy to buy back into October T-bills and some shorting of the November maturities (given the talk of extending the debt ceiling to November 22). Given the Obama/Boehner plan fell through and with a general lack of any concrete action from any of the political figures, this in theory puts both the October and November maturities back in play.

China’s trade balance not so bad

While US futures naturally saw a reasonable fall, AUD/USD also attracted reasonable flows in interbank trade, hitting a low of 0.9410 on the back of the China’s September trade balance. As always, the interbank market on Monday is no place to really assess sentiment, and buyers have been quick to re-enter longs, with AUD/USD looking to fill the gap from the initial open. The big miss on the export side (-0.3% versus +5.5% expected) was driven predominantly by lower demand from emerging markets, with this region subtracting 680 basis points (or 6.8% percentage points) from the 750 basis points (7.5%) slowdown in the pace of expansion in September from the previous month. It is worth remembering as well that three of China’s biggest trading partners (Korea, Hong Kong and Taiwan) had three fewer working days due to changes in Lunar New Year.

The cynical will also say the previous corresponding period (September 2012) was also helped by some rather spurious exports figures, hence when you actually look at these export numbers perhaps things aren’t so bad. In fact, when you look at the import side, and you see imports of iron ore by 25% by value and 15% by volumes, not to mention 25% increases in crude imports, it’s hardly thematic of a shaky economy.

I’d be playing a range of 0.9301 to 0.9507 in AUD/USD in the short term, and while the USD is in full view this week, the RBA minutes and Chinese industrial production, aggregate finances and Q3 GDP (expected to increase 7.8% year-on-year) should also throw the AUD around.

On the equity side, the ASX 200 is down a modest 0.4%, while the China CSI 300 is showing limited concern to its weaker export print and higher CPI read (3.1% vs. 2.8% eyed), with the index rallying 0.2%. Japan is closed today.

European markets should see sellers on open, although our clients have been better buyers after the initial spike lower on the open of the futures markets. Buying has been more heavily centred on the DAX, CAC and MIB, although there doesn’t seem to any clear reason for this, with limited interest in the FTSE. Data is relatively light over the next twelve hours or so, with traders likely to focus on the latest eurogroup/ECOFIN meeting, although little actionable rhetoric will come out of the meeting. More focus will be placed on forming a government, while in France some focus has been placed on the French far-right polling rather well in the local council elections of Brignoles.

EUR/USD is looking to test downtrend resistance on the hourly chart at 1.3573 and there doesn’t seem to be any concern from Asian-based traders to ECB member Ewald Nowotny saying ‘euro level might have negative effect on exports’. I continue to like selling EUR/USD on rallies above 1.3600.


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