By all accounts we should hear a deal agreed in the Senate in the near term, with comments from both Majority Leader, Harry Reid, and Senate Minority, Leader Mitch McConnell saying talks are progressing well. We are also hearing quite definitive dates for both funding the different federal agencies and extending the debt ceiling.
A senate deal in the making
Once we have had concrete agreement laid down (and assuming the market is right in its belief), it will need to be signed off through the Republican-controlled Lower House, although the strong probability here is this will pass. The damage inflicted on the PR of the Republican Party through this whole saga has been significant; with the spotlight firmly on them, one would think it will have to pass, especially as the democrats will concede maintaining spending at current levels up until new the negotiations on January 15. Still, this is a positive (albeit expected by the market) even if it does mean we go through this pain again in the New Year.
The belief that Washington is seeing signs of short-term stability has given backbone for further inflows into equities in Asia, while the USD has also found buyers against the CHF and JPY. Gold has also found net sellers on the day, and while modestly oversold continues to be one of my favourite shorts over the medium term from a trend and momentum standpoint.
Japan (currently up 0.3%) has re-opened after being closed yesterday, and instead we have seen markets closed in Indonesia, Malaysia, Philippines and Singapore. The ASX 200 has rallied 1.0%, although volumes haven’t been great. The index has seen good gains of late, and dips in the index remain a buying opportunity and I am eyeing 5314 (the year’s high printed on September 27), while we could even see the top band of the Bollinger band come into to play at 5323 being a possibility in the coming weeks. US markets (S&P 500 and the Russell) may be at all-time highs, but it really feels as though they want to go higher, especially with all the reported cash on the sidelines, and this should drag most of Asia and Europe up as well.
AUD/USD heading higher, while EUR/AUD targeting lower levels
The talk on the street today has been around the AUD, with AUD/USD pushing to 0.9539, while EUR/AUD and GBP/AUD filled yesterday’s gap lower and found follow-through selling. I’ve been looking at EUR/AUD shorts and continue to feel this is a good low beta play. The RBA minutes today once again suggest the central bank has not taken rate cuts off the table, however that’s merely an insurance policy, because if it had fully removed that statement, then AUD/USD would probably be above 0.9600. The bank isn’t overly concerned by current strength (although the pair was trading at 0.9339 just prior to the October 1 statement), and the recent improvement in consumer and business confidence seems to be good ballast. AUD/USD looks a touch overbought; however a daily close above 0.9510 could see the pair push to the 97 handle in the coming weeks, although this will require some solid data out of China on Friday (Q3 GDP and industrial production).
RBA governor Glenn Stevens due to make an important speech on Friday
Friday will be very interesting, with reports that Glenn Stevens could talk more positively about the Australian economy, acknowledging the pick-up in domestic factors, potentially signalling the worst is behind us. The swaps market seems to be already positioned for this, given they are pricing in fifteen basis points of hikes over the coming twelve months.
China is modestly lower, falling 0.2% on the day. The weekend trade data showed weakness in emerging market demand, albeit due to changes in the Lunar New Year, however the bulls were more interested in the huge demand for iron ore and crude on the year. After market yesterday we also saw a solid RMB787 billion in new yuan loans in September being extended into the economy (consensus was for RMB675 billion), which accounted for 56% of the RMB1.4 trillion in aggregate financing, and presumably the strong credit demand was to allow the big banks to offer credit ahead of the shadow banking committee. Perhaps the most interesting aspect of the data releases were the huge spike in China forex reserves, which rose by $163 billion in Q3 to $3.66 trillion.
By all accounts this increase was due to underlying fluctuations in the spot market, with EUR/USD rallying and increasing the USD value of its euro-dominated reserves. What is clear though is when other emerging markets were seeing huge outflows, China was actually attracting capital and you can see why the PBOC has been active in trying to curb the strength in the RMB, especially with the pair at multi-decade lows.
Europe should reap the benefit of the S&P 500 closing on its high, with a strong open expected across the board. Traders will naturally be keen to get confirmation of a deal in the senate, although the progressive communications could realistically kick on for another day. Ben Bernanke and New York Fed President Bill Dudley will be speaking (at the Mexican central bank conference), while in Europe we get the ZEW confidence report. The UK will also release its September CPI print and a weak number (the market expects inflation to increase 2.7%) should continue to add my short GBP/AUD view.
We also get Q3 earnings from Citigroup, Intel, Johnson and Johnson and Coca-Cola. Citigroup is expected to earn $1.04 (adjusted) on revenue of $18.71 billion. The company has a pedigree at earnings time, having risen on four of the last five earnings releases.